Bankruptcy

What are some basic facts about the new bankruptcy law?

The Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") went into effect on October 17, 2005. This is the new bankruptcy law you've likely heard about. It has been about three years now, so at some point we'll have to stop calling it "new." BAPCPA introduced several changes for people seeking debt relief under the Bankruptcy Code such as:

• A new means test for some individuals filing Chapter 7.
• New document requirements.
• Eliminates some dischargeability provisions -- such as the dischargeability of some taxes in Chapter 13.
• Increases the length of some Chapter 13 plans.
• Mandatory credit counseling and debtor education required to obtain a discharge

But the good news is that bankruptcy is still around and is here to stay. There is an enormous amount of misinformation out there, but the truth is that for most people struggling with debt bankruptcy will provide the exact same result it always has: A Fresh Start Free of Most or All Debts. However, the BAPCPA changes to the Bankruptcy Code have increased the complexity of the bankruptcy process and imposed additional documentation and other requirements on people seeking a discharge. The bottom line of bankruptcy is still true: People who can not pay dischargeable, unsecured debts will be able to get a discharge. People who can afford to pay back a percentage of their debts will be able to maintain a reasonable Chapter 13 payment plan and then receive a discharge. Bankruptcy will be slightly more time consuming and expensive under new law, but it will still often be the only way out for many people who are facing debt default (or have already defaulted) and are dealing with creditor and debt collector harassment and lawsuits.

What is Bankruptcy?

Bankruptcy is intended to give people a fresh start free of debt. In bankruptcy a person either gets released from their dischargeable debts (Chapter 7) or is allowed to reduce their debts to a manageable level and maintain a payment plan (Chapter 13). Although bankruptcy certainly helps some people out of bad situations, the bankruptcy laws are not simply charity. They are meant to encourage entrepreneurial risk taking and the freedom that the U.S. economy depends on for growth.

• You are trying to keep debts current but your are going without the essentials of life to do so (you do not need to do this).
• You have defaulted on credit card debt and are dealing with debt collectors who are not willing to help you and are rude and harassing.
• You have defaulted on credit card debt and are being sued or already have civil judgments against you.
• You have looked into credit counseling and found that they demanded a payment you could not afford or, worse, you have been essentially scammed out of money.
• You have lost a job or had a reduction in income
• You have incurred substantial medical debt because of illness or an accident.
• You have fallen behind on house or car payments and are facing foreclosure or repossession.

People often feel embarrassed and feel like there is no hope when they find themselves in situations like these. They may know that bankruptcy exists but are scared by it. Bankruptcy is not something to take lightly, but it is not as scary as you might think. You owe it to yourself to at least know your options. Bankruptcy sometimes is the best way out of a bad situation and on to a better future.

What is Chapter 7 Bankruptcy?

The goal of a Chapter 7 bankruptcy is to wipe out ("discharge") your debts. In exchange for having your debts erased, you must give up all your property to your creditors. This sounds rather harsh, but it is really not as bad as it sounds. You need only give up your non-exempt property, which for almost everybody, once the proper exemptions are applied, amounts to nothing. In many cases, much or all of your property may be exempt. You will have a chance to determine what property you have which is not exempt, if any, with your bankruptcy lawyer prior to filing your bankruptcy petition.

If you make more than the median income based on household size, you will have to contend with the "means test" to determine if you can receive a Chapter 7 discharge or would be better suited to file a Chapter 13. Even if you fail the means test, special circumstances can still make some people eligibility for a Chapter 7 discharge.

The means test just applies to people who have family income greater than the median income. In Massachusetts, the median income by family size in 2009.

• Family of one: $54,842
• Family of two: $66,437
• Family of three: $83,104
• Family of four: $100,280
• Add $6,900 for each family member above four. 

Massachusetts is a pretty wealthy state and the numbers are higher than most places in the nation. However, even if the means test is inapplicable to you because your family makes less than the median, the United States Trustee is currently taking the position that the old "totality of the circumstances" abuse test still applies. This test is more vague but essentially says that if you have the ability to fund a reasonable Chapter 13 repayment plan out of your income you should do so.

What is Chapter 13 Bankruptcy?

Bankruptcy under Chapter 13 allows you to create a plan which you will pay into on a regular basis. Initially, a Chapter 13 bankruptcy sounds less attractive than a Chapter 7 filing: Chapter 13 requires you to pay into a plan whereas a Chapter 7 just wipes out your dischargeable debts. In some cases a Chapter 7 filing will be more advantageous. However, Chapter 13 has many benefits. Some are:

• It can be used to defend against foreclosure, allowing you to satisfy unpaid mortgage bills (or tax bills) over time when your lender is demanding that you pay in one lump sum in order to stop foreclosure.
• The cost to file Chapter 13 is often lower than Chapter 7, especially under the new bankruptcy law. People often want to file a bankruptcy case quickly; Chapter 13 can often be the way to do this.
• Chapter 13 bankruptcy stays on your credit report for three fewer years than Chapter 7 does (seven instead of ten).
• There is no reaffirmation in Chapter 13. This avoids a sometimes sticky situation related to car loans in Chapter 7; you do not need to potentially undergo a cumbersome reaffirmation process to keep cars for which you have a loan in Chapter 13.
• Property is never taken and sold in a Chapter 13. It is not a "liquidation" chapter, it is a "reorganization."
• Chapter 13 payments are often quite low, allowing a debtor to pay pennies on the dollar to unsecured creditors.

What are the advantages of Bankruptcy?

The advantages to a bankruptcy filing can be significant. Often it is the only thing that can save your home or can forestall the tax authorities from taking action against you. Bankruptcy also helps people who just can't make ends meet because of a lost job, mounting medical expenses, or for other reasons. Erasing or substantially reducing debts that you owe to creditors such as credit card companies can dramatically improve your financial circumstances and quality of life.

What are the disadvantages of Bankruptcy?

The fact that you declared bankruptcy will appear on your credit report. The bankruptcy can stay on your credit report for up to 10 years from the date of filing. However, keep in mind that many people already have severely damaged credit before they file for bankruptcy. Many people report that they are surprised by the easy availability of credit after bankruptcy. Filing bankruptcy will not stop you from getting student loans in the future that are guaranteed by the government (such as the Stafford, Perkins, and PLUS loans that most students get).

We have recently introduced a new service for our clients. We will work with clients after bankruptcy to ensure that their credit reports are accurate. The result is often an improved credit score which facilitates access to credit on favorable terms after bankruptcy.

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