2005 Bankruptcy Laws
For most of us, filing bankruptcy has always been very much a last resort, something to be considered only when all other options have failed. However, many people abused the bankruptcy system, using it to wipe the slate clean even if they had the means to repay what they owed.
It was an attempt to stop this abuse that gave rise to the 2005 changes to the bankruptcy laws. These new laws will make it much harder for many people to escape their debts through bankruptcy, but it may also make it harder for those who are in debt through no fault of their own.
The formal name of this new law is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, and the new law provides sweeping changes that all consumers must consider before declaring bankruptcy.
One of the most significant changes is the fact that those whose income is at or above the median for your state will be required to go through a bankruptcy test to see if they qualify for filing Chapter 7 bankruptcy. If the court feels the debtor has at least $100 a month in extra income after paying living expenses, that debtor may instead be required to file Chapter 13 bankruptcy, which requires the repayment of some debt.
The new bankruptcy law uses IRS guidelines on housing and food. For instance, approximately $200 is allotted for food and less than $800 is allotted for housing costs and utility payments. Fortunately, those with serious medical problems, those in the active military and low income veterans may be eligible to receive special treatment under this new bankruptcy test.
Part of the new law also requires debtors to enter into credit counseling services. The idea is that those credit counseling services will help consumers avoid ending up in the same dire straights again. Those seeking bankruptcy protection must enter credit counseling within 180 days of the filing date.
Fortunately for the younger set, the new law has given child support payments a higher priority than other debts, and the law also provides some protection for the equity built up in a home. Those who bought their homes more than three years and four months before the bankruptcy filing can exempt up to $125,000. It is important to note that this exemption overrides the unlimited homestead exemptions that are in place in certain states.
It is no secret that bankruptcy filings have been on the rise, although how much of the surge was due to consumers trying to get in before the deadline is unclear. What is crystal clear, however, is that all consumers must educate themselves about the new bankruptcy laws before considering this drastic step.