Bankruptcy Law Changes

Several new bankruptcy law changes were passed back in 2005. That's good news for the credit card industry, since they had been pushing for tougher bankruptcy laws for nearly ten years. For many consumers, this new law meant a rush to file for bankruptcy before the October 2005 deadline.

Bankruptcy Statistics

For many families, filing for bankruptcy is a difficult and painful decision. If you think that many filers are wealthy families looking to beat the system, think again. According to recent studies, the vast majority of filers earn less than $25,000 a year, and many of these families experienced the loss of a job in the months or years prior to filing.

Additional Resources

Credit card companies stand to gain from these changes, with estimates as high as $5 billion annually. Credit card companies point to the rising rate of bankruptcy filings, with 2.1 million cases in 2005. Bankruptcies were up by nearly 140% over the ten-year timeline before these changes were enacted. Credit card companies are often hit the hardest when individuals do file for bankruptcy, because the money owed is usually in the form of an unsecured loan on a credit card.

Recent Changes to the Bankruptcy Laws

Former Senator Edward M. Kennedy was an outspoken critic of the changes to the bankruptcy law, citing his own statistics:

Approximately 50% of all bankruptcies were caused, at least in part, by illness or medical debts. Medical bankruptcy involved roughly 2 million Americans in 2001.
Credit card profits have skyrocketed in recent years. From 2000 to 2004, credit card profits jumped from $20 billion to $30 billion - a 50% increase.
The credit card industry is looking to entrap many of those same individuals that cannot manage their debt, including aggressively seeking out teenagers. The average household now has more than $8,500 in credit card debt alone.

Modifications to Bankruptcy Law

Altogether, there were six important changes to the existing bankruptcy law that affect both individuals and businesses. The categories of these changes include:

Eligibility for Bankruptcy - it is now more difficult for individuals to file for Chapter 7 bankruptcy.
Proof of Income - federal income tax returns will be used as proof of income, and the information will be supplied by the IRS.
Chapter 13 Bankruptcy - as more individuals are excluded from Chapter 7, there will be a migration to Chapter 13 filings, which require setting up repayment plans.
Credit Counseling - credit counseling is now mandatory for individuals declaring bankruptcy.
Child Support and Alimony - money going towards the payment of child support and / or alimony are now prioritized.
Automatic Stay Protections - declaring bankruptcy is no longer a guarantee of protection against creditors.

The paragraphs below address these six important changes in additional detail.

Eligibility for Chapter 7 Bankruptcy

Under the new law, certain individuals are prohibited from filing for Chapter 7 bankruptcy. Specifically, individuals whose income is above the state median and who can afford to pay $100 per month to creditors can no longer file for Chapter 7. The determination as to whether or not the individual can afford to pay $100 or more a month will be calculated using Internal Revenue Service rules as a guide as to what constitutes reasonable expenses.

Tax Returns Used as Proof of Income

The IRS will also get involved when determining sources of income. That's because the new bankruptcy law requires the use of federal tax returns as proof of income. That's true whether the person is filing for Chapter 7 or Chapter 13. If the filer did not pay federal taxes in the prior tax year, then they need to file a tax return before declaring bankruptcy.

Bankruptcy Filings under Chapter 13

Since many filers will no longer be eligible for Chapter 7, that means they must file for Chapter 13 bankruptcy. The primary difference between Chapter 7 and 13 is that Chapter 13 requires the debtor to enter into a multi-year repayment plan that is based on an expense-to-income formula. This means mandatory payments are made to creditors under Chapter 13.

Credit Counseling

The new law also requires mandatory credit counseling using a government approved program. The purpose of using a credit counselor would be to equip the filer with the basics of home budgeting, personal finance, or economics. Credit counseling must take place before individuals file for bankruptcy, while debtor education must take place after filing.

Unpaid Child Support and Alimony

Current bankruptcy law prescribes a repayment system, based on standardized calculations, for debtors to pay off money owed creditors. The new bankruptcy law changes this repayment priority, and places families owed child support and alimony at the top of the list. That means family members get paid before credit card companies or other lending institutions.

Automatic Stay Protections

Under current law, individuals filing for bankruptcy are protected against creditors and debt collectors until after their bankruptcy proceeding. The new law changes some of these "automatic stay" protections; especially those involving legal action against the debtor. This means that filers are no longer protected against possible eviction, driver's license suspension, as well as child support and divorce proceedings.

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