New Bankruptcy Rules: Tougher Hurdles for Debtors

New Bankruptcy Rules: Tougher Hurdles for Debtors

On April 20, 2005, President Bush signed into law an amendment to the Bankruptcy Code. This marks the largest overhaul of the Code since its 1978 enactment.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("Act) is expected to take effect in October, 2005. Sponsored by Iowa Sen Charles Grassley, and touted by banks and credit card companies, the Act is aimed at decreasing bankruptcy filings, creditor losses, and loopholes and incentives in the current system which permitted opportunistic, and serial, filers.

The Act also has significant ramifications for corporations, small business, and farmers, as well as those who administer consumer estates and or counsel debtors to achieve bankruptcy relief.

Four Important Changes Under the Act

Stuck in a debt-repayment trap. Many middle-income American families used to file under Chapter 7, which essentially permitted the debtor to wipe out debts, but enabled the debtor to sell their home or cars. Under the 2005 amendment, debtors may be required to file under Chapter 13, which requires a debtor to make payments based upon a payment plan. A debtor can be forced into Chapter 13 if income exceeds the state median income and there is at least $100 in monthly discretionary income, which will be applied to debt repayment.
Increased legal fees. Because the Act incorporates provisions to hold the bankrupt's attorney accountable for certain errors or omissions, and possibly civil sanctions, the cost of legal fees will naturally increase. A court can award costs and fees to a trustee who successfully pursues a Section 707(b) motion for a violation of improper Chapter 7. The impact will place a chilling effect on Chapter 7 filings making it the exception rather than the rule.

Creditors gain more access and control over the estate's assets. Creditors will now have access to tax filings and compare such filings with court-filed documents and expenditure declarations; any discrepancies can be challenged by the creditor. Creditors can also foreclose on property if they were improperly notified of the bankruptcy filing, but they may not touch IRAs.
Debt counseling required. The Bankruptcy Court will now require debt counseling for all debtors, however, no set curriculum or licensed organizations have yet been created.

The impact of the Act on debtors is tremendous. It will be harder to qualify for bankruptcy protection, and once a debtor in before the Bankruptcy Court, access to their finances will be easier for creditors to achieve. Fresh starts from overwhelming debts and get a fresh start will become much harder in October, 2005.

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