On October 17, 2005, major changes to the bankruptcy laws took affect, impacting millions of consumers. This article will provide some general information about the two types of consumer bankruptcies, and how the new laws apply.
CHAPTER 7 vs. CHAPTER 13
Chapter 7 (liquidation) bankruptcy has the benefit of wiping out all of your unsecured debt (credit cards, personal loans, utilities and medical bills) without having to make any payments on them at all. However, if your assets are too high, a bankruptcy trustee may sell those assets and disburse the proceeds to the unsecured creditors. The vast majority of Chapter 7 filings are "no asset" cases, where there are no assets available to pay toward unsecured debt. Another incentive to a Chapter 7 filing is that it generally takes only four to six months to conclude the case after filing. You are then free to rebuild your financial life. Secured loans, such as mortgages and car loans, are also dischargeable in bankruptcy; the lender still has the right to foreclose the house or repossess the car if payments are not made on time.
Filing for Chapter 13 (repayment) bankruptcy on the "eve" of a home being foreclosed upon is a common practice for many people. Under Chapter 13, you are able to continue paying your current mortgage, plus an additional amount toward your past-due balance, without fear of being foreclosed on. If you also have unsecured debt, you are required to also pay at least a portion of that debt over the life of the Chapter 13 plan, usually three to five years.
Your income level will determine which of the two options will be available to you, using the median income of your state as the defining factor. In addition, for both options, debt counseling will now be required before you can file for bankruptcy.
OTHER CHANGES UNDER THE NEW LAW
Debtors will be required to file all tax returns that are currently due. Attorneys for the debtors may face personal liability or sanctions if an ineligible debtor files for Chapter 7 or if information in the debtor's petition is inaccurate, thus increasing the time and expense an attorney will need to spend reviewing each petition. Coupled with the increase in filing fees charged by the court, the cost of filing for bankruptcy may increase substantially.
Debts arising from divorce and for privately funded student loans will join other debts currently non-dischargeable such as recent taxes, child support and federally guaranteed student loans.
Filing for bankruptcy will no longer significantly delay the collection of back child support or stop a landlord from evicting a debtor.
FINAL OBSERVATION
Until Bankruptcy Courts interpret the new law, it will remain unclear what its full impact will be. It is expected that it will be more difficult and more expensive for the average person to discharge their debts. If you are concerned about your financial circumstances, and are considering bankruptcy, you should contact an experienced bankruptcy attorney now to obtain advice about whether to file before new bankruptcy laws take effect.
Meet Richard B. Johansen
We are pleased to welcome Rick Johansen, Attorney at Law, to our firm. Rick has a unique background in law. Following his graduation, Summa cum Laude, from Northeastern University, he worked as an auditor for Grant Thornton International, CPAs. He then studied law at Western New England College, graduating in 1995; while in law school, he worked in the Berkshire County District Attorney’s office. Rick brings over 10 years of experience in Berkshire County, specializing in bankruptcy and real estate, as well as business, civil litigation, estate planning, and landlord and tenant issues.
