Congress to Make Chapter 7 Bankruptcy Tougher
Congress works on
legislation that would keep many people from wiping out their debts with
Chapter 7 bankruptcy!
Congress considers legislation
that will bar some people from filing for Chapter 7 bankruptcy -- the kind
of bankruptcy that lets people over their head in debt sell off some of
their assets to pay creditors, keep the rest, and cancel much of the remaining
debt. The legislation would also make it harder to wipe out some kinds
of debts, including credit card debt.
The credit card industry lobbied
hard for the new law and donated millions to members of Congress.
Because the House and Senate
passed different versions of the bill, they must now try to come to an
agreement in a congressional committee. Whether they are successful and,
if so, whether President Bush will sign it into law is still up in the
air.
Listed below are some of the
changes in the bankruptcy law that would affect consumers who hope to file
for Chapter 7 bankruptcy. However, many changes in the new legislation
affect both Chapter 7 and Chapter 13 bankruptcy.
If you are looking at bankruptcy,
you will probably want to file before the new rules take effect.
New
Rules Test to Determine Eligibility
People this legislation will hurt:
Those who have above-average income and could afford to pay at least $100
per month to creditors
The new bill will prohibit
some people from wiping out their debts by filing for Chapter 7 bankruptcy.
This is a huge change. Under current law, most people can wipe out their
debts as long they can't afford to pay off a large portion of it in Chapter
13 (repayment) bankruptcy.
Under the new bill, anyone
whose household income is more than their state's median won't be allowed
to file for Chapter 7 bankruptcy if their monthly income, less certain
payments they're already making plus set amounts for expenses, leaves enough
to pay off a small amount of their debt.
The amount debtors can subtract
for many expenses (like housing and transportation) has nothing to do with
their actual expenses -- they must use the figure set by the IRS for their
region of the country.
People who don't qualify for Chapter 7
will be pushed into Chapter 13 bankruptcy, which requires debtors to come
up with a three- to five-year repayment plan.
More People Will Lose Their Homes
People this legislation will hurt:
People who have lots of equity in their homes and live in a state that
protects most or all of it
People who are current on
their mortgage payments when they file for Chapter 7 bankruptcy may or
may not lose their homes -- it depends on the amount of equity they have
and on state law.
For example, if a state
allows debtors to keep $50,000 of equity in a home (this is called the
homestead exemption), someone who has $40,000 of equity is safe. More than
$50,000 equity, though, and the home may have to be sold to pay creditors.
The House and Senate versions
of the new bankruptcy law differ on this point. The House bill limits state
homestead exemptions to $100,000 if the debtor bought the home within two
years before filing for bankruptcy; the Senate version has a $125,000 cap.
President Bush opposes any
cap; his home state, Texas, imposes no cap and lets debtors keep a house
no matter how much it's worth.
Bankruptcy Court Procedures
Will Get More Complicated!
People this legislation will hurt:
People who want to handle their own bankruptcy case.
At the moment, the process
for most Chapter 7 bankruptcy filers consists of filing some papers with
the bankruptcy court and attending one hearing. Creditors can challenge
the bankruptcy only in a few situations.
The new bill, however, greatly
increases the number of situations where a creditor can challenge a case.
Many debtors will need to hire an attorney.
Fewer Debts Wiped Out
People this legislation will hurt:
People who recently bought luxury goods or received cash advances, people
with private student loans, some people with child support obligations
that aren't court-ordered.
Some debts can
never be wiped out in Chapter 7 bankruptcy. The pending legislation expands
this list of debts to include:
-
Debts of $250 or more incurred to buy luxury
goods or services (such as vacations and expenses for hobbies or entertainment)
shortly before filing. The Senate version of the bill imposes a $750 limit.
Under current law, the limit is $1150.
-
Cash advances of $750 or more incurred shortly
before filing. Under current law, the limit is $1,150.
-
Student loans that are not guaranteed by the
federal government. Most student loans, however, are federally guaranteed.
-
All child support and alimony debts. Under
current law, some child support obligations can be cancelled if they are
part of a divorce agreement, but not ordered by the court.
Only One Bankruptcy Every Eight Years
Under current law, people can file for Chapter
7 bankruptcy again six years after they complete a Chapter 7 case. The
new law increases that period to eight years. In addition, the House bill
prohibits filing for Chapter 13 bankruptcy until five years (three years
in the Senate bill) after a Chapter 7 bankruptcy.
All this information is freely available
many places on the web. We hope to this web page will make this complicated
issue a bit more understandable.
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