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Despite fierce public debate and staunch opposition, Congress passed a new (and tougher) bankruptcy law last October - effectively making the process of filing for bankruptcy more difficult for financially strapped Americans. While there's little doubt the new law benefits creditors far more than it does those seeking financial relief, bankruptcy may still be a viable option if you fit the criteria.
If you're considering filing for bankruptcy, you need to be aware of the new changes and how they will affect you. Regardless of whether you intend to file for Chapter 7 (all debts discharged) or Chapter 13 (you'll be required to pay back some or all of your debt), you are now required to undergo credit counseling. The counseling is designed to help you determine if bankruptcy is your best option or if you can conceivably repay your debts. Your counselor will help you create a repayment plan, even if repaying back your debts may be impossible.
The good news is you do not have to abide by the repayment plan or take the counselor's advice. If you choose to file for bankruptcy, you can. You are simply required to undergo credit counseling before you can file. If your counselor devises a repayment plan, you are required to turn it, and a certificate testifying that you completed the counseling, in to the court prior to filing. The court will look at this to determine is you really "need" to file.
But that's not the end of your credit counseling. Once you've actually filed for bankruptcy, you must again attend counseling to learn how to effectively manage your finances. Only after you've taken this step will your debts be discharged. There's no way around this requirement as the bankruptcy court requires you to provide proof of successful completion of counseling.
The theory is that allowing you to discharge your debts without teaching you where you went wrong and how not to get into that situation again won't help you stay out of future financial trouble. The goal is to teach those who really need to file how to protect themselves from being consumed by debt in the future.
The new law means it's no longer possible for everyone to file for Chapter 7 bankruptcy. The new law has added income restrictions - if your income is too high, then you'll either have to reconsider your options or opt to file for Chapter 13. Each state has its own median income that will determine whether you can file for Chapter 7 bankruptcy. If your income falls above the median, you'll be required to take the so-called "means test".
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The means test will determine if your monthly disposable income is sufficient to cover Chapter 13 payments each month. The means test takes into account your disposable income and your monthly debt (such as child support or alimony). The IRS has also set guidelines to allow you to deduct certain expenses from your monthly income when taking the means test. In short, you'll be able to file for Chapter 7 if your disposable income is less than $100 each month.
If you do not pass the means test, you can file for Chapter 13. Unfortunately, thanks to the new laws, filing for Chapter 13 may very well mean that money becomes even tighter. Chapter 13 requires you to form a repayment plan using all of your monthly disposable income. The hitch is: your allowed expense amounts will be calculated according to IRS guidelines, not according to your actual expenses. In many instances, the set expenses are less than your actual expenses.
That means you'll likely be paying more than you can really afford. Unfortunately, the new bankruptcy law has also made things even more complicated for bankruptcy lawyers which means you'll be paying more in attorney's fees. However, if you're struggling financially, you still have the option of filing for bankruptcy. The process is just no longer as simple as it once was. The law, while hurting some honest Americans in need of debt relief, was created to prevent abuse in bankruptcy claims. If someone says they can't afford their debts, the new laws make you take great steps to prove it.
If you're considering bankruptcy, you can find a list of approved credit counselors and the median income for your state by visiting the Department of Justice's Trustee website.
Related Articles:
+ What you need to know about chapter seven bankruptcy
+ Information about chapter thirteen bankruptcy
+ The types of debts a person can discharge when filing bankruptcy
+ Credit counseling before filing for chapter seven or thirteen
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