The Bankruptcy Reform Act has passed by Congress. This bill will make filing for bankruptcy almost impossible for the average person. While many may welcome this, you must understand that the vast majority of people that file bankruptcy (98%) do so because of a serious medical problem, divorce or the loss of the primary income. This bill was heavily supported by the credit card industry and the banking industry. MBNA, the largest issuer of credit cards reported NET income last year of $2.68 BILLION. A $340 million increase from the previous year.
|Section & Heading||Summary|
|Section 102: Dismissal or conversion changes|
CURRENT LAW "There will be a presumption in favor of granting the relief requested by the debtor" NEW LAW "..whether the granting of relief would be an abuse of the provisions of this chapter [Chapter 7], the court shall presume abuse exists if the debtors - income(gross) - expenses( IRS guidelines) x 60 months is equal to or greater than $6,000 See the means test to be applied - the debtor is abusing the provisions of this Chapter. The Court can dismiss or force a conversion to Chapter 13 This change PRESUMES ABUSE from the start....not innocence.
|Section 106: Credit Counseling|
See Section 106 for specific changes In general "an individual may not be a debtor under this title unless such individual has, during the 180-day [6 months] period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency described in section 111(a) an individual or group briefing (including a briefing by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis." and "complete an instructional course concerning personal financial management described in section 111..." Who can argue that having debtors attend educational classes on financial management is a bad idea? Not debtor attorneys. But the problem is with whom those classes are going to be provided by. In the last 8 or nine years, the number of credit counseling services available has risen considerably. And many of them have run afoul of the law. These nonprofit agencies derive their necessary income FROM THE CREDIT PROVIDING COMPANIES. That's right. The non-profit credit counseling services get their money from the credit card companies, the banks and lenders that debtors deal with. And now, the law gives them a new source of clients.
|Section 214: Exceptions to the Automatic Stay #1|
A new class of actions has been added, all generally related to domestic support obligations(DSO). 1. income withholding for DSO will continue; 2. withholding or restricting a drivers license; 3. interception of a tax refund; We are stongly in favor of enforcing DSOs, but if the bankruptcy court is charged with managing debts during a bankruptcy, ALL debts should remain under its supervision.
|Section 228: Disclosures #1|
Anyone that considers the career of bankruptcy petition preparer will be asking for permanent headache. This section makes it impossible for a preparer to comply with the law in any way that protects them from violation.
|Section 302: Discouraging Bad Faith Repeat Filings|
If you filed a bankruptcy and it was dismissed: 1. If you file a second bankruptcy within a year i. if the automatic stay was lifted in the previous case, the automatic stay expires in 30 days in the new case unless a hearing to extend it is held within the 30 days and only if you can demonstrate that the second filing is in good faith. ii. the second filing is PRESUMED to be in bad faith unless you can show otherwise at the hearing. 2. If you file a third bankruptcy within a year i. the automatic stay, is not automatic...no stay is granted without a hearing. ii. the third filing is PRESUMED to be in bad faith. In many instances, a chapter 13 is filed with substantial unsecured debts. For general reasons, it fails and it is converted to a chapter 7 to eliminate the unsecured debts. Once completed, a second chapter 13 (a third bankruptcy case) is filed to effectively deal with secured debts. In other situations, the unsecured portion of the debt makes reorganization very difficult. By filing a chapter 7 to deal with the unsecured debt and then a chapter 13 to deal with the secured debt, effective reorganization is possible. This is often called a chapter 20, and this would seriously prevent it's use. Often, especially in cases of foreclosure, the stay is necessary to accomplish the actions that will allow the debtor to effectively reorganize. This section prevents this form of reorganization. The number of cases that this is designed to stop is less than a fraction of 1% of the filed petitions.
|Section 303: Curbing Abusive Filings|
"..an order entered under paragraph (4) shall be binding in any other case under this title purporting to affect such real property filed not later than 2 years after the date of entry of such order by the court." Once an order for relief is granted, in general, it stays in force for 2 years. In cases where good faith has been shown, but it has been less than 2 years since relief was granted in a previous case, this is probably going to be used by secured lien holders to keep the property out of the stay. Litigation is going to occur clearing this conflict up...
|Section 304: Debtor Retention of Personal Property|
in a chapter 7 "the debtor shall...(6)...not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors... reaffirms, or redeems the property. Examples of purchase money security: computers, recreation craft, furniture. Most attorneys are going to recommend surrendering the property. In most cases the value of the property is such that it is beneficial to the debtor to give back the personal property and getting credit for the fair market value.
|Section 306: Giving Secured Creditors Fair Treatment in Chapter 13|
"For purposes of paragraph (5) section 506 shall not apply to a claim....incurred within the 910-day [2.5 years] period preceding the date of filing...the collateral for that debt consists of a motor vehicle...or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing." 11 USC 506 is used (now) to deal with claims that are secured, but not completely. If a car is worth $5,000 (using acceptable means of determining the value) but the loan against it is $10,000, 506 allows a debtor to pay the $5,000 as secured and the balance as unsecured. The result to the creditor is much less (usually) than the $10,000 - and no interest is paid on the unsecured portion. This section protects the creditor for the first 2.5 years. If the car is worth $2,000 and the debt is $20,000 but the car was purchased only 2 years prior to filing...the entire $20,000 is a secured claim. Further, 11 USC 506(d) is used to void a lien when a mortgage holder (usually a second or third) is completely unsecured because the first mortgage is more than the value of the house. This will protect those lenders that offered home equity loans to 125% of the value.
|Section 307: Domiciliary Requirements for Exemptions|
If you moved to a state with an exemption for an unlimited amount of equity in your home and then filed bankruptcy, you had to wait at least 6 months to do it. The change here makes the 'waiting' period 2 years. This is going to have an impact on people with big incomes or assets (Ken Lay anyone?) AND on people that moved to a new state and got into financial trouble because it didn't work out.
|Section 311: Eviction: Automatic Stay #2|
ONE OF THE BIGGEST CHANGES... "11 USC 362....does not operate as a stay.... "of the continuation of any eviction, unlawful detainer action, or similar proceeding by a lessor against a debtor involving residential property in which the debtor resides as a tenant under a lease or rental agreement and with respect to which the lessor has obtained before the date of the filing of the bankruptcy petition, a judgment for possession of such property against the debtor." No longer will the bankruptcy law protect you from getting thrown out on to the street by your landlord. S/He has a judgment of eviction, pack up, the federal court will stand by and watch it happen. There are some limitations.
|Section 313: Definition of Household Goods|
THIS IS VERY IMPORTANT! CHANGES HERE WILL HAVE A DRASTIC EFFECT Definitions.
|Section 314: Debt Incurred to Pay Nondischargeable Debts|
Some time ago, someone had the wonderful idea of using your credit card to pay your taxes. Two benefits: lots of miles in the cards frequent miles programs, and if you filed bankruptcy, the debt would be discharged. Well, it wasn't allowed for your federal taxes before, now... "...incurred to pay a tax to a governmental unit, other than the United States, that would be nondischareable under paragraph (1); You still might get to keep the miles..
|Section 315: Giving Creditors Fair Notice in Chapters 7 and 13: Debtor's Duties|
Debtor shall file: "(iv) copies of all payment advices or other evidence of payment received within 60 days before the date of the filing of the petition, by the debtor from any employer of the debtor" The last 60 days pay stubs from all employers for debtor and/or spouse. Regarding tax returns In brief, if you are in a chapter 13, you have a new deadline to file your tax return....March 31st. 90 days after the end of the tax year.
|Section 318: Chapter 13 plans to have a 5 year duration in Certain cases|
Another means test: "If the current monthly income of the debtor and debtor's spouse combined, when multiplied by 12, is not less than -- (A) in the case of a household of one, the median family income for 1 (B) in the case of a household of 2, 3 or 4, the highest median family income for a family of the same or fewer individuals, or (C) in the case of a household of more than 4, plus $525 per month for each individual in excess of 4 the plan may not provide for payments over a period that is longer than 5 years 3 years (or 5 if approved by the court) if the current monthly income is less than (A), (B) or (C) as applicable...
|Section 319: Expansion of Rule 9011|
Congress wants this rule to be expanded to require that all documents submitted to the court by debtor attorneys ...have made reasonable inquiry to verify that the informationcontained in such documents is -- well grounded in fact. What is reasonable inquiry? We ask, debtors tell? Probably not. We ask, debtors provide proof? Probably. Well grounded in fact. If the debtors say they only have one TV, do we need to go to their house to verify it? Do we need to lay out all the jewelry and have it appraised? What about a hot tub, or golf clubs, or bikes?
|Section 322: Limitations on Homestead Exemption|
"..to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period [3 years + 4 months] preceding the date of the filing of the petition that exceeds in the aggregate $125,000..." There are few states that allow unlimited exemptions on homesteads so this is going to only affect filers in those few states...but, are the states going to allow the federal law to "trump" their own exemptions?
|Section 327: Fair Valuation of Collateral|
"(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined." Replacement value...not the value of the property on the open market. This is a kettle of worms. Under what conditions would a retail merchant offer for sale a couch 4 years old? And at what price compared to new? If a pawn shop and a refinishing shop both offered a 4 year old couch, which one do you think creditors will want to use for their valuation? The Debtor? Judge decides...and decides, and decides....
|and finally... Section 102a: Attorney Certification|
(4)(A) The court, on its own initiative or on the motion of a party in interest, in accordance with the procedures described in Rule 9011..., may order the attorney for the debtor to reimburse the trustee for all reasonable costs in prosecuting a motion filed under section 707(b)... ...(C) The signature of an attorney on a petition, pleading, or written motion shall constitute a certification that the attorney has -- (i) performed a reasonable investigation into the circumstances that gave rise to the petition, pleading or written motion; and is well grounded in fact.... ...(D) The signature of an attorney on the petition shall constitute a certification that the attorney has no knowledge after an inquiry that the information in the schedules filed with such petition is incorrect. Frankly, any attorney that signs such a petition or pleading should have his/her head examined. Clients lie. What will constitute a reasonable investigation is going to be litigated, as is "well grounded in fact".
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