Under the Old Law: The debtor could elect to file either
a Chapter 7 or Chapter 13 bankruptcy. Debtors whose debts were primarily consumer debts were subject to scrutiny by the trustee or the judge as to whether they had enough disposable income that permitting them to file Chapter 7 would be a "substantial abuse." If they did, the case could be dismissed or the debtor could convert to a
Chapter 13.
The New Law: A "means test" determines whether a debtor can file Chapter 7 bankruptcy. Anyone with an income equal to or below the
median income (for families of the debtor's size in his state) is exempt from the means test. For those debtors with income above the median income, there is a presumption of abuse on the part of the debtor, which the debtor has the burden of disproving.
In applying the means test, the debtor's average income over the past six months is used, regardless of present actual income. Mortgage and car payments, and the amount necessary to pay back taxes and past due child support, are subtracted. Private and public school expenses for children are limited to $1,500.00 per child per year. If, after deducting (1) those amounts and (2) the living expenses provided in
the IRS’s national collection standards, the debtor could pay at least $6,000.00 to unsecured creditors over 5 years (i.e., $100.00 per month), the debtor’s only option is Chapter 13.
Barriers to Filing
Under the Old Law: Any individual who was willing to submit to the jurisdiction of the bankruptcy court could file a bankruptcy case.
The New Law: Debtors must obtain approved credit counseling before they can file bankruptcy (within the six months prior to filing bankruptcy - counseling in the form of "an individual or group briefing" from a "budget and credit counseling agency"). Unfiled tax returns must be filed within weeks of the commencement of the case. Lawyers for debtors (but not lawyers for the creditors) face personal liability and monetary sanctions if their client turns out not to have been eligible for Chapter 7 bankruptcy, or if the allegations in the petition are later shown to be false. The filing fees for bankruptcy cases are increased. Legal fees charged by debtors' attorneys are
expected to increase substantially.
In addition, section 727(a)(1) requires that the debtor must "complete an instructional course concerning personal financial management" some time after the petition is filed. This is in addition to the credit counseling that the debtor had BEFORE he filed.
Chapter 13
Under the Old Law: Debtors often chose Chapter 13 bankruptcy so that they could cure mortgage arrearages,
catch up on back taxes, discharge debts not dischargeable in Chapter 7 bankruptcy, and/or keep nonexempt assets. Secured debts such as car loans could be reduced to the present value of the collateral. The debtor’s disposable income for determining how much of the pre-filing debt must be repaid was determined by the judge’s assessment of
what living expenses are necessary and reasonable for the debtor and his family. Plans ran for three years unless the debtor proposed a longer plan, which could not exceed five years.
The New Law: Disposable income is calculated using the IRS collection standards, rather than giving the judge any
discretion or flexibility. "Strip-down" of liens on cars is limited to vehicles purchased more than 2.5 years before the
bankruptcy. Debtors whose gross income exceeds the state median are required to remain in Chapter 13 for five
years. It is unclear how the means test guaranteeing a certain level of repayment to unsecured creditors will
intersect with the debtor’s efforts to cure mortgage arrearages and prevent foreclosure on his home.
Multiple Bankruptcies
Under the Old Law: Debtors could file Chapter 13 immediately following a chapter 7 discharge to pay debts that
"survived" Chapter 7 (this is the so-called "Chapter 20" bankruptcy). After a Chapter 7 discharge, the debtor had to
wait at least six years before filing another Chapter 7. Debtors whose Chapter 13 cases were dismissed prior to a
discharge (for instance, where they fail to make the plan payments) could refile, so long as the new case was filed in
good faith.
The New Law: The interval between Chapter 7 discharges is eight years. A Chapter 13 may not be filed within
four years of a Chapter 7 discharge. No change is made on the debt caps for eligibility for Chapter 13.
The Automatic Stay
Under the Old Law: The "automatic stay" uniformly stopped collection actions against the debtor or his property,
and required the creditor who wanted to continue enforcing state law rights to get permission from the bankruptcy
court (in the form of a motion to lift stay).
The New Law: The automatic stay is hedged or conditioned in many circumstances, creating less certainty about
immediate protection for the debtor. Filing bankruptcy will not stay (stop) actions to collect back child support, including revocation of driver’s licenses or professional licenses (see Chapter 232 of the Texas Family Code). Creditors who aren't
listed in the schedules are free to continue collection action even if they have actual notice of the bankruptcy filing. If a prior case is dismissed, the duration or even the existence of a stay is limited in subsequent cases. Landlords may follow through with evictions even when the tenant-debtors are paying rent.
Discharge of Debts
Under the Old Law: Debts not dischargeable in Chapter 7 bankruptcy included
recent taxes, child support, and student loans, plus a group of debts that may be
nondischargeable if the creditor could prove that the debt was incurred by various kinds of dishonesty or that the debt
was created in a divorce proceeding. Chapter 13 provided for a broader "super discharge" that allowed the
discharge of more kinds of debts in exchange for undertaking a repayment plan.
The New Law: More debts are nondischargeable in Chapter 7 bankruptcy, including privately-funded student loans,
all debts arising from divorce (that is, debts listed in a divorce decree), and unsecured debts incurred to pay
nondischargeable debts such as taxes or support (in other words, if you get a cash advance on your credit card to pay
your income tax, the credit card balance becomes non-dischargeable). Presumptions of fraud are broadened to
include purchases of "luxury goods" of $500.00 or more within 90 days of filing or cash advances of $750.00 or more
within 70 days of filing (the amounts and the time limits were different before October 17). A Chapter 13 discharge
won't cover (1) taxes even if the taxing authority didn’t file a timely claim, (2) taxes for years that you didn't file a return,
nor (3) debts tinged with dishonesty.
Homestead Exemption
Under the Old Law: Homestead (in Texas) was exempt, with very few exceptions or conditions.
The New Law: If you have more than $125,000.00 worth of homestead exemption, you must have been a resident
of Texas for at least 1,215 days (3.3 years).
For a joint filing, this probably means $125,000.00 exemption for each debtor (total: $250,000.00).
Income Tax Returms
Under the Old Law: There were no requirements having to do with income tax returns.
The New Law: You must now file, along with your petition and schedules, a copy of your most recent income tax
return. And if a creditor asks for a copy, you're required to send one to him.
Conclusion
The new law imposes new duties on debtors and their attorneys, and failure to timely perform those duties will result in
dismissal of the case or lifting of the automatic stay. Coupled with the new limitations on a second filing, the
consequences of mistakes, inattention, or misfortune become far more serious, as the court and the trustee have less
discretion to deal with human frailty and intervening circumstances. The presumption that the debtor is entitled to
relief from his debts is effectively replaced by presumptions that the debtor’s filing is abusive (until the debtor proves
otherwise).
These are the features of the new law that impact the average debtor. Exactly how the new law actually will work (or
not work) will only become known as debtors, lawyers, trustees, and judges try to apply it to the real world of
consumers and their debts.
The copyright
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to all materials in these pages is owned by Mark D. Dunn, except as otherwise noted, or by the original author, and no
materials may be copied, published, or otherwise used without permission.
Disclaimer (the fine print)
The information on this website is not legal advice, and it may not be applicable to any specific set of facts ...
especially your own personal situation. The perusal of this website does not establish an attorney-client relationship.
You should consult an attorney for advice regarding your individual situation, and I invite you to contact me; I welcome
your calls and emails. Contacting me does not create an attorney-client relationship. Please do not send any
confidential information to me. I am an attorney licensed by the Supreme Court of Texas to practice law in all State
courts and certain Federal courts, but I'm not board certified by the Texas Board of Legal Specialization.
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