Bankruptcy Changes and Qualifications
The number of bankruptcy filings increased 17.5% during the first three months of 2010 compared to the same time period in 2009. This is according to the data released by the Administrative Office of the U.S. Courts on May 14th. Considering the economic state of this nation, the economic state of the globe, the number of unemployed, the housing crisis which seems to have no end and the current uneven debt to income ratio that is now plaguing the average consumer, many are asking themselves if bankruptcy is a viable option.
In 2005 new bankruptcy laws were adopted and implemented, changing the entire landscape of debtors that could actually qualify for the relief that can accompany a bankruptcy proceeding. Since the 2005 changes, many find it more difficult to qualify for Chapter 7 bankruptcy because their income in considered too high. A Chapter 7 bankruptcy is a liquidation proceeding which requires the debtor turn over all non-exempt property to a bankruptcy trustee who will then convert those assets into cash for distribution to the creditors. The 2005 changes also implemented a counseling program which requires all who want to file for bankruptcy attend a 341 conference with a government pre-approved counseling agency, which is required under section 341 of the bankruptcy code. This conference helps debtors determine if they will qualify for filing of Chapter 7 or Chapter 13 bankruptcy according to the guidelines in the bankruptcy code.
One of the first steps in determining your qualification for Chapter 7 is to measure your “current monthly income” against the median income for a household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy, if it is more than the median than you must pass the “means test”, another requirement of the new law. The purpose of the “means test” is to determine if you can afford to pay back some of your debt after assessing your disposable income compared to your household expenses and debt. To find out whether you pass the means test, you subtract certain allowed expenses and debt payments from your current monthly income or you can use a means test calculator. If the income that’s left over after these calculations is below a certain amount, you can file for Chapter 7, if not, you will then be directed to the filing procedures of Chapter 13 bankruptcy.
Chapter 13 bankruptcy, also known as reorganization bankruptcy, is filed by individuals who want to pay off their debt over a period of 3 to 5 years. This type of bankruptcy appeals to individuals who have non-exempt property that would be lost through Chapter 7 bankruptcy proceedings.
Other changes that have been implemented since 2005 have affected some bankruptcy filers in a negative way. One notable change is how property is valued at replacement cost instead of at auction value, which means more debtors are at risk of having their property taken and sold by the trustee, leaving the debtor with less assets than when they began the process. Individuals considering bankruptcy must first ask themselves if they can set a course of debt repayment for themselves or if they require a third party to assist them in this process. Once an individual has determined this course they must then weigh the benefits and pitfalls that will inevitably accompany this choice.
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