In 2005 Congress passed new bankruptcy law changes to making filing Chapter 7 Bankruptcy more difficult. Ironically, despite the fact that it is widely considered unfriendly to consumers seeking relief through personal bankruptcy, the federal legislation was named The Bankruptcy Abuse Prevention & Consumer Protection Act of 2005. The differences and adjustments were sweeping.

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New Rules Make Filing Chapter 7 Bankruptcy More Difficult

Perhaps the single most important change to the bankruptcy laws involves the limitations it imposes on consumers who make more than the median income of their state. Under the old system, a person's decision to file Chapter 7 or Chapter 13 was up to them. In most cases, consumers chose Chapter 7 because it often meant they could wipe the slate clean without paying the debt. (Chapter 13 Bankruptcy involves using your disposable income to pay the debt back over 3 to 5 years). Under the new laws, however, your eligibility for Chapter 7 depends on your income. If your income is less or equal to the median income of your state, you can file Chapter 7. If your income is more than the median, you must pass the "means test" in order to file Chapter 7 bankruptcy.

Tougher State Exemptions

The state you live in allows you to protect part of the equity of your home from creditors. However, the new bankruptcy law overrules the unlimited or very lenient homestead exemptions in some states that allow people to file bankruptcy while keeping their homes. Under the new law, if you bought your house less than three years and four months before filing for bankruptcy, the exemption for your house is limited to $125,000 regardless of your state's law. States with unlimited homestead exemptions or protections greater than $125,000 include Arizona, Arkansas, California (if you are older than 55 and/or disabled), Washington D.C., Florida, Iowa, Massachusetts, Minnesota, Nevada, Oklahoma, Rhode Island, South Dakota, and Texas.

Also, before the recent changes to the bankruptcy law, consumers were allowed to file under the protections of the state in which they currently resided. Now, however, you must choose the bankruptcy exemptions according to the following rules:

If you lived in your current state for at least 2 years, you use the bankruptcy exemptions of that state.
If you lived in your current state for between 91 days and 2 years, you use the bankruptcy exemptions of the state where you lived the better part of the 180 day period prior to filing.
If you lived in your current state for less than 91 days, you will follow the bankruptcy laws of the state you lived in prior. (You can use federal bankruptcy exemptions if that state allows it, however).

How the Changes Will Affect What You Pay Your Attorney

Since declaring bankruptcy under the new laws is so much more complicated, lawyers' fees have risen to accommodate the extra leg work. Moreover, the new bankruptcy law imposes serious liability on the lawyer, who is now subject to various fees and fines if any information presented is found to be inaccurate or misleading. What this means is not only will fees be higher, but many attorneys have left the bankruptcy field, so finding a lawyer to represent you is more difficult. Less competition will most likely translate into even higher fees.

New Laws Make Chapter 13 Bankruptcy Even Less Favorable

As with the old bankruptcy law, people who file Chapter 13 are forced to pay all of their disposable income to the courts in order to pay back their creditors. The only difference is that under the new laws, the court determines your disposable income, not the other way around. More specifically, before bankruptcy reform the payment for Chapter 13 was determined by subtracting your living expenses from your income. Now it's determined by subtracting "allowed expenses" based on local averages from your income. Even worse, your income is not your current income but the average of the past 6 months.

The Credit Counseling Requirement

The paper tiger of the new bankruptcy legislation, the credit counseling requirement obliges debtors to meet with a federally approved credit counselor for 90 minutes budge analysis in the 6 months prior to claiming bankruptcy. The general purpose is to determine whether simple debt management will alleviate the debt problem, but from all accounts, the consumers who are meeting for these consultations are generally better fit for bankruptcy. Also, before your debts are officially discharged, the debtor is required to take money management classes. Both of these requirements are paid for out of pocket by the consumer, although some credit counselors will waive their fees if you show an inability to afford it.
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