There are many misconceptions about bankruptcy, so let’s clear the air:
We get fairly regular calls at our office asking if Congress ended bankruptcy years ago. The fact is…bankruptcy is still an available option.
Once you file, the automatic stay (which suspends a lawsuit, eviction, or debt collection proceedings) still goes into effect and immediately stops collection efforts. You may even be able to get back some of your garnished funds.
The main change created by Congress with bankruptcy reform legislation – officially called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 – was to establish a test to determine consumer eligibility for bankruptcy relief per Chapter 7 (where assets are liquidated and debts discharged), and extend the payments for Chapter 13 cases up to five years.
If you file Chapter 7 bankruptcy, you need to pass the “means test” to qualify for Chapter 7. This test determines if you have enough money to pay back a percentage of what is owed to your creditors. Your petition for bankruptcy may be denied if you have an excess income of $100 or more after living expenses are paid, for the six months average before filing for bankruptcy.
The court considers your actual living expenses in conjunction with IRS estimates for living expenses. Allowable deductions (such as secured creditor payments, child support payments, costs to care for a disabled or sick family member or yearly private school expenses) are also factored. If you have a total household income falling below the state’s median family income amount, you need to pass the means test to determine eligibility to petition for Chapter 7. If you pass, Chapter 7 bankruptcy is likely to be allowed and granted to you by the court.
If Chapter 7 bankruptcy is not an option or a home foreclosure or tax issues are primary, a second option may be to file for Chapter 13 bankruptcy. This is used with a court approved payment plan to repay your debts over a proposed 36 to 60 month time period. During the time of repayment, you are on a budget.
Another change requires you to receive approved credit counseling before filing a petition in bankruptcy court. You must also take an approved debtor education course before your debts are discharged. This is usually not a big deal and can be done over the phone, online, or in person in about an hour.
After the counseling session, you are given a certificate stating that the mandated counseling is completed. The certificate will be required to file for bankruptcy. After filing, you are also required to attend one more counseling sessions to receive a discharge and complete the case.
The Bankruptcy Reform Act was the first major change in decades. It reduced the number of filings in the short term. Now, nearly as many people are using bankruptcy as an option. Filing for bankruptcy is a big decision, but it allows you to make a fresh start toward managing debt and developing more responsible credit obligations in the long run.
