What You Need to Know About New Bankruptcy Law

The new bankruptcy law (enacted 10/17/2005) represents a major reform of the U.S. bankruptcy system. Under the old rules, most filers could choose the type of bankruptcy that seemed best for them - and most chose liquidation (chapter 7) over repayment (chapter 13).

The new law will prohibit some filers with higher incomes from using Chapter 7. Instead they will have to repay at least some of their debt under Chapter 13. In many cases such alternative makes filing for bankruptcy much less attractive.

To determine weather or not you are eligible for chapter 7 (complete form) you need to compare your income with the state average for your household size. If you income is less then the median then you are eligible for chapter 7 (liquidation). U.S. Census Bureau kindly offers median family income per state per family size numbers on their website. If your income is higher then the median then further analysis is performed, looking at the debtor's calculated ability to fund a Chapter 13 plan.

The debtor's disposable income is calculated applying a mix of actual and standardized expenses to the debtor's previous average income! In a nutshell if the debtor can pay $10,000 in five years or as little as $167/month to creditors, a presumption arises that a Chapter 7 filing is "abusive". Below is a complete diagram of the income analysis.

The debtor may still become eligible for chapter 7 if he/she is currently unemployed and doesn't really have the ability to pay that the test suggests.

All debtors will have to get credit counseling before they can file a bankruptcy case - and additional counseling on budgeting and debt management before their debts can be wiped out.

The new law also imposes new requirements on lawyers. The main one is that the lawyer must personally vouch for the accuracy of all of the information their clients provide. This along makes it harder to find an attorney to represent you in a bankruptcy case.

Legal issues and bankruptcy questions are frequently complex and individual. You should consult with a bankruptcy attorney licensed to practice in your state for advice about your particular situation.