On October 17, 2005, significant changes were made to the United States Bankruptcy laws. Most of the changes were made to require those with incomes above a certain threshold to repay their creditors rather than discharging their debts.
Below is a quick overview of some of the most important changes in these Bankruptcy laws. (Note that the information below highlights selected changes in the law; many other changes were also made by the new legislation.)
Chapter 7 and Chapter 13 Filing Restrictions
- In Chapter 7 cases, a debtor cannot refile a subsequent chapter 7 case for eight years -- increased from six year. A debtor must now wait 8 years between Chapter 7 cases.
- A Chapter 13 debtor is barred from receiving a discharge if the debtor has received a discharge--
(1) in a chapter 7 case during the 4-year period preceding the date of the order for relief under the chapter 13 laws, or
(2) in chapter 13 case during the 2-year period preceding the date of such order.
Debtor's Duties
Filing requirements expanded: Unless the court orders otherwise, the new law requires all debtors to file with the court:
• evidence of payments (e.g. pay stubs) received from any employer within 60 days before the date of the filing of the case;
• an itemized statement of net monthly income; and
• a statement disclosing any anticipated increase in income or expenses reasonably expected during the 12 month period after the petition date;
If an individual Chapter 7 or Chapter 13 debtor fails to file all of this information within 45 days after the petition filing date, the case will be automatically dismissed effective on the 46th day.
Tax returns: The debtor must now file certain tax returns with the trustee and other tax returns with the court. The law now requires the debtor to file with the trustee seven days before the first date set for the first meeting of creditors a copy of the debtor’s Federal income tax return or a transcript of same for the most recent tax year ending immediately before the petition date. Failure to provide either the trustee with the tax return will result in dismissal of the debtor’s case unless the debtor is able to demonstrate that the failure was due to circumstances beyond the debtor’s control.
Miscellaneous filing requirements: The new laws require an individual debtor to file: a credit counseling certificate describing the services provided to the debtor along with a copy of the debt repayment plan, if any, developed through the agency; a record of the debtor’s interest in a state tuition program or education individual retirement account; in chapter 13 cases, an annual statement of income and expenditures
Mandatory Credit Counseling
The law now requires individual debtors to receive a credit counseling briefing from an approved agency during the 180 day period before the petition date. The debtor may receive the briefing in either an individual or group format. The briefing may be conducted by telephone or over the internet. The briefing must outline the debtor’s opportunities for credit counseling and assist the debtor in performing a budget analysis. In most case, a list of approved credit counseling agencies will be posted on each bankruptcy court’s website along with a hard copy available at the clerk’s office.
A debtor that fails to obtain credit counseling is not be eligible to file bankruptcy unless the debtor resides in a district where the U.S. Trustee or bankruptcy administrator has determined that approved agencies are not reasonably able to provide counseling services to additional individuals.
Debtor Education
Before a chapter 7 debtor receives his or her discharge from the court, he or she must complete a second or post-petition instructional course on personal financial management. A similar bar to the Chapter 13 discharge is provided in the new law. The instructional course must provide debtors with "learning materials and teaching methodologies designed to assist debtors in understanding personal financial management ...."
Automatic Stay; Automatic Dismissals
Domestic relations exceptions: The law was amended to exclude from the automatic stay (i.e. the provision of the bankruptcy law that prohibits certain creditors from pursuing the collection of their debts during the bankruptcy case) certain actions concerning child support or domestic relations matters. With the change in the law, action can be taken after the filing of a bankruptcy petition concerning child custody, visitation and domestic violence and divorce proceedings except to the extent that they seek to divide property that is property of the estate. To assist in the collection of amounts due for domestic support obligations, the law now permits the withholding of income that is property of the estate for the payment of domestic support obligations, as well, as the withholding of the debtor’s drivers license or a professional license.
The law also allows the interception of a tax refund and the reporting of overdue child support.
Pension loan exception: The change in law now permits the withholding of income from a debtor’s wages to repay a loan from an ERISA qualified pension plan sponsored by the debtor’s employer.
Eviction actions: A landlord can now continue with an eviction against a debtor tenant, in certain situations, when the landlord has obtained a judgment prior to the filing of the case. However, the debtor/tenant may have the right to “cure” the default in the lease.
Avoidance of Transfers to Self-Settled Trusts
The bankruptcy trustee can now avoid any transfer of property that was made on or within 10 years before the petition date if the debtor made the transfer to a self-settled trust, the debtor is the beneficiary of the trust, and the debtor made the transfer “with actual intent to hinder, delay or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.”
Exclusions from Property of the Estate
Money paid to an education retirement account or state tuition credit account at least 365 days prior to the petition date is NOT property of the bankruptcy estate (meaning that it is outside the bankruptcy court’s reach and cannot, therefore, be taken by the trustee) if the funds are designated for the benefit of the debtor’s child, stepchild, grandchild or step-grandchild is not an asset of the estate. There is a $5,000 limit placed on funds contributed “not earlier than 720 days nor later than 365 days” before the filing date.
Also excluded from property of the estate are wages withheld by an employer for payment as contribution to ERISA-qualified retirement plans, deferred compensation plans, tax-deferred annuities, and health insurance plans. These wages cannot be “recaptured” by the trustee. The exclusion is for “any amount” withheld from wages.
Exemptions
Residency requirement: The residency requirement that must be met before the debtor can file his or her case in a particular court was changed -- a debtor reside in a state for a period of 730 days (2 years) prior to filing bankruptcy under that state’s exemption laws. If the debtor’s domicile has been located in more than a single state during the 730 day time period, the law now requires that the governing exemption law will be the state in which the debtor’s domicile was located for 180 days immediately preceding the 730 day period “or for a longer portion of such 180 day period than in any other place.” This precludes a debtor moving from one state to another to take advantage of that state’s more favorable exemption rules.
Homestead exemption: The federal homestead exemption is now limited to $18,450.00. State laws can have different homestead exemptions. If the debtor elects state exemptions, the new law limits the debtor’s homestead exemption to $125,000.00 if the debtor’s interest was acquired during the 3 1/3 year period preceding the petition date. But this $125,000.00 cap does not apply if: (1) the debtor acquired the homestead interest from the debtor’s previous residence; (2) the debtor’s previous residence and current residence are located in the same state; and (3) the debtor acquired the previous residence prior to the beginning of the 3 1/3 year period.
Dischargeability
Credit card debts: The new law now states that consumer debts owed to a single creditor for more than $500 for luxury goods incurred within 90 days of filing and cash advances for more than $750 within 70 days of filing are presumed to be non-dischargeable. Luxury goods are defined to exclude goods and services reasonably necessary for support or maintenance.
Student loan debts: The law now expands the definition of student loans to include qualified educational loans as defined under he Internal Revenue Code.
Priority -- The Order in which Creditors are Paid
Domestic support and child support obligations were moved higher on the payment priority list -- meaning that they will, most likely, be paid before other creditors are paid from the bankruptcy estate. The first priority on the payment of creditors from the sale of the assets of the estate is for unsecured claims for domestic support obligations owed to the debtor, a child of the debtor, and governmental units. The law added a tenth priority for claims for death or personal injury incurred by the debtor while driving under the influence of drugs or alcohol.
Means Testing
In Chapter 7 cases, the debtors must prepare a "means test" that lists income and expenses. If the income exceeds the expenses by a certain amount, the bankruptcy court is now required to presume abuse exists -- which means the case will be dismissed or converted to a Chapter 13 case.
While not a "means test" in Chapter 13 cases, the new law was changed to provide that if the “current monthly income” of the debtor and the debtor’s spouse combined when multiplied by 12 is not less than the applicable state median family income, the chapter 13 plan may not provide for payments over a period that is longer than five years. If the combined current monthly income of the debtor and the debtor’s spouse when multiplied by 12 is less than the applicable state median family income, the plan may not provide for payments over a period that is longer than three years unless the court approves a longer time period that does not exceed five years.
Reaffirmation Agreements
To be enforceable, a reaffirmation agreement must: (1) be made before the granting of the discharge; (2) the debtor must receive an extensive set of new disclosures; (3) the agreement must be filed with the court along with an attorney declaration, if applicable; (4) the debtor must not rescind the agreement prior to discharge or within 60 days after the agreement is filed; (5) §524(d) must be fully complied with; and (6) if the debtor is not represented by an attorney, the court must approve the agreement. Further, for the reaffirmation agreement to be enforceable, the new law provides that the debtor must receive expanded disclosures either at or before the time the debtor signs the reaffirmation agreement.
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