The “bankruptcy reform act,” formally known as the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” (BAPCPA), took effect on October 17, 2005. Contrary to many media reports, although filing bankruptcy will be a more complicated and expensive process, most people will still be able to file either Chapter 7 or Chapter 13 Bankruptcies. Most legal experts are still attempting to understand the numerous and complex new provisions of the Act. Some of the more important changes are:
1. Requirement for budget and credit counseling and education
An individual filing for bankruptcy must have received credit counseling from an approved “nonprofit budget and credit counseling agency” within the 180 day period prior to filing bankruptcy. The counseling may be done in-person, over the telephone, or via the internet. A list of approved agencies can be found at http://www.usdoj.gov/ust/bapcpa/ccde/.
In order to receive a discharge under Chapter 7 or 13, the debtor(s) must also complete an instructional course in personal financial management through an approved nonprofit agency. In the past, Chapter 13 debtors (in this Division and in the Amarillo, San Angelo and Wichita Falls Divisions of the Northern District of Texas) were required to complete a similar Financial Management class. A list of approved agencies can be found at http://www.usdoj.gov/ust/bapcpa/ccde/.
2. The concept of “Current Monthly Income” (CMI)
This “means test” will not just look at a person’s paycheck or average monthly income figure that he or she supplies on the bankruptcy forms. “Current Monthly Income” means the amount of a person’s gross income from all sources, whether taxable or not, for the past 6 month period divided by six (6). All sources would include child support, unemployment insurance, pensions, retirement, and military living allowance payments. Social Security benefits, payments to victims of terrorism, crimes and crimes against humanity are excluded from the “Current Monthly Income” amount.
The formula for calculating CMI may have some strange results, for example, a person who recently lost a high-paying job, but who is not even receiving unemployment may have too large of a CMI figure for Chapter 7. Conversely, a person, such as a former student, who recently was employed at a lucrative job, might have a low CMI.
3. “Means testing” for Chapter 7 Cases
In a Chapter 7 case involving individual with “primarily consumer debts”, the case may be subject to dismissal for substantial abuse or converted to a Chapter 13 case if the person’s income is above the amount specified by a “means test” in the Bankruptcy Code. The calculations involved in this means test are too complicated to completely describe here---any person who is interested in learning more about bankruptcy should consult with an attorney.
Contrary to media reports, this “means testing” will not prevent most persons from filing a Chapter 7 case. The first thing to consider is that the “means testing” only applies to individuals with “primarily consumer debts.” This would exclude some persons who need to file bankruptcy because of debts from a failed business or taxes. There is one catch, that is, the court normally will look at the percentage amount of debt, so that such a debtor (for example, a debtor with a failed business) with a large mortgage may be still considered to have “primarily consumer debt”.
This “means testing” is a two (2) step process. First, the debtor’s “Current Monthly Income” (CMI) is compared with the median state income for a similar size family. If the CMI is equal or less that the median state income, there will be no “presumption of abuse,” and the “means testing” end there.
If the Current Monthly Income is above the state median, then a relatively lengthy number of deductions are subtracted from the CMI. These deductions include, but are not limited to the IRS allowances for living expenses, housing, etc., taxes (not including sales or real estate taxes, health care allowances and a number of individualized expenses that a court believes to be reasonable and necessary). Also deducted is 1/60th of the amounts to be paid on secured debts, such as mortgages, car payments, etc. If---after the all these amounts are subtracted from the CMI---the result is less than zero (0) or between 0 and $100.00 per month, there is no presumption of abuse and the case will not be subject to dismissal.
Although this “means testing” is complicated and sounds harsh, it appears most persons will still be able to file Chapter 7 because (1) many persons in the Abilene area earn less than the state median income, and; (2) even if they earn more and are paying for vehicles and a mortgage, the amount after deductions may likely com to under $100.00 per month.
4. Changes in Chapter 13 Plans
Under the new law, a debtor may no longer pay only the market value of a motor vehicle purchased within the 910 days (2½ years) prior to the filing of the case. In other words, the entire debt on such vehicles must be paid through the Plan.
The duration of a Chapter 13 Plan is now 5 years for debtor(s) whose income exceeds the state median. This is not that much of a change for persons filing in the Abilene, Amarillo, San Angelo Divisions, as most Chapter 13 Plans were already. lasting for a duration of 5 years.
The amount of “disposable income” which must be paid into Chapter 13 Plans is also governed by a “means testing” formula using the Current Monthly Income. One difference is that child support or spousal support normally will not be counted toward “disposable income.”
5. Notices to Creditors
Congress has restricted the manner in which notice of the bankruptcy must be given to creditors. Now, creditors may file a preferred address with the bankruptcy courts, or designate an address for bankruptcy notice in the last 3 “communications with debtors.” Persons interested in filing bankruptcy should pay close attention to bills and statements received from creditors. It appears that some creditors tend to obscure this notice by placing it on the back side of statements in un-bolded print. In addition, all notices must also contain the account numbers.