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Summary of the New Bankruptcy Bill

Bankruptcy law underwent sweeping reform on April 20, 2005 when President Bush signed into law the The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Section 1501 of Senate bill S. 256 generally provides that the legislation is effective as to cases which are filed 180 days after enactment (cases filed Monday, October 17, 2005). Various sections, however, will become effective immediately, including the provision that limits Homestead Exemption to $125,000 under certain circumstances. The following summary briefly sets out the areas of bankruptcy affected by the new law.

Chapter 7 Eligibility “Means Test”
The Trustee or any creditor can bring a motion to dismiss under §707(b) if the debtor’s income is greater than the state median income. Abuse is presumed if the debtor’s current monthly income, determined be a specific mathematical formula, is greater than $100 per month of a Chapter 13 plan. Debtors who meet this new standard would be shifted to 5-year repayment plan under Chapter 13. The presumption of abuse may only be rebutted by demonstrating “Special circumstances that justify additional expenses or adjustments of current monthly income.”

If a debtor’s income falls below the state median, the court may still find abuse but the creditors do not have the standing to file the motion.

Mandatory Credit Counseling
Individuals are ineligible for relief under the Bankruptcy Code unless they have, within 180 days prior to filing, received credit counseling from an “approved nonprofit budget and credit counseling agency”, either in an individual or group briefing. These counseling agencies are to be approved by the U.S. Trustee. (exceptions made where there is an emergency and the person could not receive counseling within 5 days, or where the Trustee has determined that the approved agencies are not adequate to provide the required counseling.) If a debt management plan is developed it must be filed with the court.

Limit on Auto Lien Stripping in Chapter 13
Chapter 13 plans must provide that a secured creditor retains its lien until the payment of the entire debt, not just the secured portion, where the creditor holds a security interest in a motor vehicle purchased within 910 days of the filing.

Debtor Education
The court may not grant a Chapter 13 discharge unless the debtor has completed a mandatory education course in personal financial management as approved by the U.S. Trustee. A debtor can be denied discharge under §727 if the debtor fails to complete the course.

Scope of Discharge
Debts owed to a single creditor totaling more than $500 for luxury goods incurred within 90 days of filing are presumed non-dischargeable; cash advances of $750 within 70 days are similarly treated.

Serial Filings
A discharge will not be granted in Chapter 13 if the debtor obtained a discharge in Chapter 7, 11 or 12 within the 4 years prior to the date of filing of the pending case, or in a Chapter 13 case filed within 2 years of the pending case. This provision, though, does not prevent the debtor from filing a Chapter 13 case, and receiving the benefits of the stay, including the ability to cure arrearages on secured claims over a period of time.

Longer Time Period Between Discharge
A Chapter 7 Debtor cannot receive a discharge if a prior Chapter 7 or 11 discharge was received within 8 years (rather than the old 6-year limit) of the new filing.

Homestead Exemption

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