Bankruptcy Law Changes
Back in 2005, there were several important changes to the laws governing the bankruptcy process. That was good news for the credit card industry, which had been pushing for tougher bankruptcy laws for nearly ten years.
For many families, filing for bankruptcy is a difficult and painful decision. There is also a misconception that filers are oftentimes wealthy families looking to beat the system. According to a report of 2011 bankruptcies in the United States published by the Office of Judges Programs Statistics Division, the average filer earns less than $31,000 a year. Unfortunately, these same individuals reported annual expenses of nearly $34,000.
The rush to file before these tougher laws were put in place was short-lived. According to the Census Bureaus' 2012 Statistical Abstract, in the four years leading up to the change in bankruptcy law, there was an average of 1,170,000 filings annually. The table below shows the total number of filings since 2007 through 2019:
Source: U.S. Bankruptcy Courts
Modifications to Bankruptcy Law
There were six important changes to the existing bankruptcy law that affected both individuals and businesses. The categories of these changes include:
- Eligibility for Bankruptcy: it is now more difficult for individuals to file for Chapter 7 bankruptcy.
- Proof of Income: federal income tax returns are now used as proof of income, and the information is supplied by the IRS.
- Chapter 13 Bankruptcy: as more individuals are excluded from Chapter 7, there will be a migration to Chapter 13 filings, which require setting up repayment plans.
- Credit Counseling: credit counseling is now mandatory for individuals declaring bankruptcy.
- Child Support and Alimony: money going towards the payment of child support and / or alimony is now prioritized.
- Automatic Stay Protections: declaring bankruptcy is no longer a guarantee of protection against creditors.
Eligibility for Chapter 7 Bankruptcy
Under the new law, certain individuals are prohibited from filing for Chapter 7 bankruptcy. Specifically, individuals whose income is above the state median and who can afford to pay $100 per month to creditors can no longer file for Chapter 7. The determination as to whether or not the individual can afford to pay $100 or more a month will be calculated using Internal Revenue Service rules as a guide as to what constitutes reasonable expenses.
Tax Returns Used as Proof of Income
The IRS will also take a lead role when determining sources of income. That's because the new bankruptcy law requires the use of federal tax returns as proof of income. That's true whether the person is filing for Chapter 7 or Chapter 13. If the filer did not pay federal taxes in the prior tax year, they need to file a return before declaring bankruptcy.
Bankruptcy Filings under Chapter 13
Since many filers are no longer eligible for Chapter 7, they must file for Chapter 13 bankruptcy instead. The primary difference between Chapter 7 and 13 is that Chapter 13 requires the debtor to enter into a multi-year repayment plan that is based on an expense-to-income formula. This means mandatory payments are made to creditors under Chapter 13.
The new law also requires mandatory credit counseling using a government approved program. The purpose of using a credit counselor is to equip the filer with the basics of home budgeting, personal finance, or economics. Credit counseling must take place before individuals file for bankruptcy, while debtor education must take place after filing.
Unpaid Child Support and Alimony
Prior bankruptcy law prescribed a repayment system that was based on standardized calculations, allowing for debtors to pay off money owed creditors first. Under the new law, repayment priority places families owed child support and alimony at the top of the list. That means family members now get paid before credit card companies or other lending institutions.
Automatic Stay Protections
Under prior law, individuals filing for bankruptcy were protected against creditors and debt collectors until after their proceeding. Under the current law, filers are no longer protected against possible eviction, driver's license suspension, as well as child support and divorce proceedings.
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