There is a new bankruptcy law. The Bankruptcy Abuse and Consumer
Protection Act goes into effect on October 17, 2005. Listed below are
updated answers to common questions regarding bankruptcy:
What
is the new bankruptcy law?
The Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005, a major reform of
the bankruptcy system was passed by Congress and signed into law by
President Bush in April 2005.
The new law makes many
changes to the existing law. Before
you decide whether to file, it is critical to consult with a consumer
bankruptcy attorney who has been trained on the new law.
When
did the law take effect?
The new law went into
effect on October 17, 2005. All
bankruptcies filed after that date are governed by the new law.
What
are the major changes in the new law?
Major provisions of the
new law include:
-
Mandatory
Credit Counseling. Before
filing for bankruptcy most applicants must receive credit counseling
in a government-approved program.
-
A
“means test” determines who can file for Chapter 7 bankruptcy.
Under the new law, bankruptcy applicants who wish to file
under Chapter 7 must meet certain eligibility requirements under a
“means test.”
Under
the means test, if your current monthly income is less than the median
income in New Jersey, you can file for bankruptcy under Chapter 7.
But
if your current income is above
the median income in New Jersey and you can afford to pay $100 a month
toward paying off your debt, you cannot file under Chapter 7 and must
proceed under Chapter 13. What
you can afford to pay is based on a formula that includes your monthly
income, your expenses, and the total amount of your debt.
-
Tax
returns and proof of income are required.
Under the new bankruptcy law, people wishing to file
bankruptcy under Chapter 7 or Chapter 13 must show proof of their
income by providing federal tax returns from the last year.
If you want to file bankruptcy but have not paid taxes for
the previous tax year, you must do so before the bankruptcy can
proceed.
-
More
filings under Chapter 13. As
discussed, if you are ineligible for filing under Chapter 7 based on
the means test, you must file under Chapter 13 instead.
There are a number of differences between Chapter 7 and
Chapter 13, but the main distinction is that under Chapter 13 you
enter into a repayment plan in which you must repay a certain amount
of money to creditors, based on a strict expenses-to-income formula.
-
Fewer
“Automatic Stay” Protections for Filers.
Under bankruptcy laws in effect before October 17, 2005,
people who file for bankruptcy are entitled to certain immediate
protections from creditors and others – including most debt
collection and lawsuit actions.
These protections are part of what is called the “automatic
stay” effect of a bankruptcy filing, because many potential legal
actions against the filer are stopped.
But under the new bankruptcy law some of these protections
will be eliminated.
-
New
Priority for Unpaid Child Support and Alimony.
Bankruptcy laws provide a system of re-payment priority for
people and companies that are owed money (called “creditors”).
Under the new bankruptcy law, among the changes in creditor
priority is that people who are owed unpaid child support and
alimony will take priority over any other creditor.
-
Mandatory
Financial Management Education.
After the conclusion of bankruptcy proceedings.
Before any debt can be discharged, bankruptcy debtors must
participate in a government-approved financial management education
program. This program
is undertaken after the debtor has obtained credit
counseling.
Where
do I go to get credit counseling?
Credit counseling must
be certified by the US Trustee Program.
Depending on the agency, you can get counseling in person, over
the phone, or over the Internet. Contact
our office for a list of agencies certified in New Jersey.
Where
do I go to get financial management education?
Financial education
programs must be certified by the US Trustee Program.
Depending on the agency, you can get education in person, over
the phone, or over the Internet. Contact
our office for a list of the agencies certified in New Jersey.
Your bankruptcy
attorney can help you find a program that meets your needs and the
requirements of the new law.
Can
I file for bankruptcy if I have unpaid taxes?
The new law requires
people filing either a Chapter 7 or Chapter 13 to show proof of their
income by providing federal tax returns from the last tax year. If you have not filed your tax return for the last tax year,
you must do so before filing.
What
documents do I need to have before I file?
You are required to
provide the following documentation before you file:
-
evidence
of any payments from any source you received within sixty days prior to filing.
-
your
income tax return for the year prior to filing and tax returns filed
while the case is pending.
Other documents and
information may be required by your attorney to facilitate the
preparation of your bankruptcy petition.
How
does the means test work?
The following
information gives you an overview of how the means test is applied.
However, you should be aware that the means test is complicated
and new rules will have to be developed over time as the new law is
interpreted by the courts. You
should consult with a consumer bankruptcy attorney before filing to
understand how the means test applies to you.
If your applicable
income is less than your state’s published median income for your size
of family, then the means test does not apply to you and you can file
Chapter 7.
If your family’s
income is above the published median income for New Jersey, then your
family’s net income for bankruptcy purposes will be calculated by a
fairly complicated formula that uses IRS standard expense figures based
on both national and local standards.
The formula makes some allowance for your own special
circumstances.
Simply stated, if your
family’s net income after deducting the expenses allowed by the
formula from your gross income is greater that a number between $100 and
$166 you will be presumed to have failed the means test and will not be
allowed to file Chapter 7 bankruptcy.
Even if you fail the means test you still have the opportunity to
demonstrate to the bankruptcy court special circumstances which rebut
the presumption of abuse and which warrant allowing you to file a
Chapter 7 bankruptcy.
The means test applies
only to people whose debts are primarily consumer debts. If most of your debts were incurred to fund a business then
the means test does not apply to you.
In that event, you can file Chapter 7 regardless of your income
and expenses unless other factors indicate that you are abusing Chapter
7.
What
other paperwork is required?
The new law adds a
requirement that Chapter 13 debtors must file their last four years tax
returns early in the case if they have not been previously filed.
Also, upon request by any party or the judge in a Chapter 13 you
must file annual financial statements of income and expenses during your
Chapter 13 plan.
How
does the new law affect spousal or child support?
The new bankruptcy law
includes a provision that a Chapter 13 plan will not be confirmed, and a
discharge will not be granted, unless you are current in your domestic
support obligations. Failure
to keep current in your support obligations after you file is grounds
for dismissal of your bankruptcy.
What
is no longer covered by the automatic stay in the new law?
The automatic stay no
longer stops or postpones:
-
evictions
if a Judgment of Possession has already been obtained
-
actions
to withhold, suspend, or restrict a driver’s license
-
actions
to withhold, suspend, or restrict a professional or occupational
license
-
lawsuits
to establish paternity, child custody, or child support
-
divorce
proceedings
-
lawsuits
related to domestic violence
After
I file, can I obtain new credit?
Yes.
The decision of whether to extend you credit belongs to each
particular lender. While
some potential creditors will reject your application for credit simply
because you have a bankruptcy on your record, others will grant you
credit because you have no other debts left and have the ability to pay
a new loan.
You may be able to
obtain credit while in Chapter 13 Bankruptcy if Court and Trustee
approval is obtained and certain rules are followed
Your attorney can help
you understand what paths might be open to you to obtain new credit.
How
can I re-establish my credit rating after bankruptcy?
The best way to rebuild
your good credit over time is by making payments every month without
fail. A bankruptcy followed
by a good payment record is much more desirable than a continued history
of unpaid bills. Creditors
also may be willing to work with you because you are prohibited by law
from filing Chapter 7 bankruptcy again for a significant period of time.
Your bankruptcy can
stay on your credit report for 10 years.
It becomes less significant the farther in the past the
bankruptcy is. The truth
is, you are probably a better credit risk to a lender after bankruptcy
than before.
Will
my bankruptcy appear on my credit report?
Yes.
Your bankruptcy can be listed in credit reports for a period of
up to 10 years. Any other
adverse information may be listed in credit reports for a period of up
to 7 years.
Please browse the different areas of
our site to learn more about bankruptcy in New Jersey. Feel free
to contact the office of Bruce C. Truesdale.
We
look forward to hearing from you soon.
