Last Updated 5/1/09

 The 2005 Bankruptcy Law Changes

President Bush signed the Bankruptcy Reform Bill into law on Wednesday, April 20, 2005. The majority of the new bills provisions took effect on October 17, 2005. Many individuals will find it much more difficult to file for Chapter 7 bankruptcy protection. Filing will be more difficult and expensive for those who can still file.

Means testing: Section 707(b) of the Bankruptcy Code was amended to provide for dismissal of Chapter 7 cases or (with the debtor's consent) conversion to Chapter 13, upon a finding of abuse.   Abuse is presumed if the debtor's current monthly income, excluding allowed deductions for expenses, permit the debtor to pay not less than (a) 25% of nonpriority unsecured debt over 60 months or $10,000.00. Expenses will be calculated as specified under the National Standards and Local Standards issued by the IRS for the area where the Debtor resides as well as the Debtors actual expenses. Debtors whose family income exceeds a national median for their size family will have to go through "means testing". Debtors with the ability to pay 25%  or more of their unsecured debt will have to file a Plan under Chapter 13 and make payments for a minimum of 5 years. For individuals with higher than normal expenses (many of which will not be counted in the means testing), the new legislation may severely hamper or altogether eliminate their ability to file for bankruptcy protection.

If the Debtor's income is less than the state median only the judge or Trustee may bring an abuse motion. A disabled veteran whose debts where incurred primarily during active duty is exempt from means testing.

Credit Counseling - All debtors must undergo consumer credit counseling within 180 days of filing and may not obtain a discharge until they complete a personal financial management instructional course.

Homestead Exemption - The Homestead Exemption is limited to $125,000.00 if the Debtor has owned the home (or homes in the same state) for less than 1215 days (3.3 years). Any equity in a homestead which is the result of a fraudulent transfer is not exempt for ten years from the date of transfer.

Additional Filing Requirements - Debtors will be required to provide copies of tax returns to the United States Trustee.

Changes to Chapter 13 - Chapter 13 now requires a minimum plan term of 5 years for debtors whose income exceeds the national median. Otherwise a three year minimum is required. 

Non-dischargeable Debts - All debts incurred by a debtor over $550.00 for "luxury goods" within 90 days of the bankruptcy filing or cash advances for more than $750.00 within 70 days of filing are presumed to be non-dischargeable.

What this means to the average consumer:

	Chapter 7 May Be Unavailable - Consumers with relatively high income compared to their unsecured debt will have to file under Chapter 13 and make payments for a minimum of five years. This may work well for many people, but for others it takes away much of the incentive to file bankruptcy.
	It Will Cost More - All of the new restrictions, intended to lessen the ease of filing bankruptcy, will result in more time and effort on behalf of the debtor and more work for their attorneys, causing higher attorneys fees.
	It May Take Longer To Re-Establish Credit - Most bankruptcy debtors now file under Chapter 7, receive their discharge in about 4 months, and can be in a position to establish reasonably good credit two years later. Under the new legislation the entire process will take longer and those required to file under Chapter 13 will not receive their discharge for five years.
	Creditors Will Be More Active - The new laws provide many benefits to creditors, including a number of opportunities to object or get involved in the process. Creditors will have more leverage to obtain payments from debtors through bankruptcy. This also means that creditors may be more difficult to deal with outside of bankruptcy.