File For Bankruptcy? New Laws for Chapter 13 and Chapter 7 that You Need to Know
Old eligibility: Previously, any debtor could choose between Chapter 7 or 13, according to what they perceived their circumstances. Chapter 7 is more lenient, but also has more stringent income requirements. However, if it looked as though the debtor might not be qualified, he or she could switch to Chapter 13 at any time, without any repercussions.
New eligibility: Things are different now. Chapter 7 cannot be considered without first passing a means test. Initiating bankruptcy filings are more difficult because of this. Additionally, rather than looking at current income, Chapter 7 looks at the previous six months’ income. If you lost your job less than two months previous, you might be in trouble. Additionally, the means increased. If the debtor can possibly repay $6,000 or more to creditors over five years, Chapter 7 is not an option.
Old filing procedures and prices: Previously, anyone could file for bankruptcy. If there was not adequate cause, the case was dismissed and no penalties were paid. Many lawyers kept bankruptcy fees down to be competitive, allowing more people access to legal bankruptcy advice.
New procedures and their implications: Before you can even file for bankruptcy, you must visit a credit counselor (don’t forget that the credit card industry helped found the credit counseling industry – and that it still heavily supports it). If you are allowed to file, you must get all of your tax returns in order within weeks of filing. Additionally, lawyers will be sanctioned with fines if their clients file, but are not eligible for, Chapter 7. If the case fails in the end, lawyers will also be sanctioned. Legal fees for bankruptcy proceedings are already on the rise, and it is likely that you will have to pay more to even seek legal advice in this matter, as lawyers will be more on their guard.
Old automatic stay: Immediate protection was extended to the filer once bankruptcy was sought. Creditors had to seek permission from the court to try to collect on debts while things were being sorted out. Additionally, there were provisions that made it difficult for landlords to evict tenants seeking bankruptcy protection.
New automatic stay: There is none. Before filing, make sure you understand that your creditors can keep trying to collect, even if your case is being heard. Additionally, even if you are currently paying rent, a landlord can evict you for back rent owed, since there is no automatic stay. The court must approve of a stay, and will do that only if it looks like your case is good (and in the case of Chapter 7, that you have already passed the means test).
Old discharging debts: Very few debts that were not dischargeable. Dishonest debts and student loans were not dischargeable. Chapter 13 acted to discharge nearly everything else, if you agreed to a payment plan that resulted in paying back some (but not all – usually a small fraction only) of the money owed. Additionally, the taxing authority had to file a timely claim in order to collect back taxes. If not, Chapter 13 discharged even these taxes.
New discharging debts: The list of debts that cannot be discharged has grown, along with the amount to be repaid to unsecured debtors. There is no way to discharge taxes. It does not matter whether the taxing authority’s claim is timely or not. There is a complicated process of adding debts to the list of dischargeable debts as well.
With the new laws in effect, it is important that you carefully consider all of your options before declaring bankruptcy. You may find that the lessened protections are not worth it, and that it turns out to be even more expensive, should you be turned down.
