What is the New Bankruptcy Law all about?
Before the new laws came out, If you had filed a Chapter 13 BK, you were required to allocate all of your Available (disposable) income what you had left over after paying your real living expenses to the Chapter 13 repayment plan. This new law adds a tough hurdle to this scenario: While people filing Chapter 13 are still required to hand over all of their available income, they now need to calculate their Actual (disposable) income, not as previously, but using "allowed expense amounts" which are published by the IRS if your average income is higher than the mean income of the state, these expenses are more often than not, lower than your actual numbers.
To make things worse, these expense amounts have to be subtracted from the average income of the person during the 6 months before filing! and not from the filer's actual earnings each month. This means that debtors are usually required to pay so much more of their "available income" into their Chapter 13 plan than they actually make, the result of which will be that many chapter 13 bankruptcies will turn into chapter 7's.
Property is now valued at market price
Previous to the new laws, Chapter 7 debtors could place a dollar amount to their property at a fire sale or an auction price. What this meant, is that cars, heirlooms, furniture, and other stuff the consumer may want, was automatically valued at almost garage sale prices or no value. It thus became under a category called 'Exempt Property' in most of the states. (This is property that creditors cannot take away, it stays with you)
With the new and improved Bankruptcy laws, they place a value on the property the same as the value of it should you buy it from a store. (sort of like what insurance companies do) This alone is sure to hike up the property value, which consequently will create more debtors who will be foreclosed upon.
Chapter 7 Eligibility - tougher and tougher
When you filed BK in past years , you could choose which chapter to choose, 7 or 13. Most people chose 7. Under the new laws, Americans with above average and higher incomes will be prohibited from filing a Chapter 7.
Are you in a high income bracket?
The first thing the court does is check if your income, for your family size, fits with the average in your state. This is determined not by your income at filing time, but rather it's the average income, 6 months before your actual court date. Many people, especially ones filing a BK due to a job loss, the money you make per month currently, according to the new rules will be significantly more of what they really take in each month at the actual filing time.
As soon as you figure out what your income is, you can then compare it to the average income for your state. (this data can be found at the U.S Trustee website at http://www.usdoj.gov/ust; look for "Means Testing information.")
To qualify for a chapter 7 BK, your income has to be less than or equal to the mean income. But, If it's more than the mean, you have to now jump a hurdle called "a means test" (another requirement of the new law) to qualify to file a liquidation BK or a Chapter 7.
What is The Means Test?
What the means test does, is figure out if you have enough available income, after taking out the allowed expenses (according to IRS) and the mandatory debt payments, to make payments on a Chapter 13 plan.
To see if you pass this test, you begin with your "current monthly or weekly/bi weekly" income, again, calculated in the past six months, From that amount, you have to subtract the following:
- Some allowed expenses, (the amounts set by the IRS.) Usually, you can't deduct your actual expenses for day to day expenditures such as getting to and from work, restaurants or food, household expenses, and so on, rather, you have to use the IRS numbers, which as said above, are usually lower than the cost of living in your region.
- The Monthly payments you will be forced to pay on priority and secured debts. Secured debts are debts for which the creditor has a lien on a property or other, and is entitled to foreclose on the property or reposses the car if you arent meeting your obligations (cars and houses are most common) priority debts are debts that the court decides that they are so important that they can move to the top of the re-payment line. Some common priority debts include tax debts, Alimony, child support, and also salary owed to employees.