A Look At The New Bankruptcy Legislation - What Were Some of the Changes?

Have you heard of the concept that a defendant is presumed innocent unless proven guilty? This American value is elusive in the Bankruptcy Reform and Consumer Protection Act of 2005, which presumes that a debtor is trying to abuse his creditors by hanging onto valuable assets and easily obtaining Chapter 7 bankruptcy protection.  In other words, the new bankruptcy legislation presumes guilt on the part of the a debtor by presuming that the debtor is acting irresponsibly and looking for an easy way out.  This is in fact not true, as discussed in our next section about who files for bankruptcy.

Making It More Difficult to File Chapter 7 Bankruptcy is the Primary Change

Chapter 7 is form of personal bankruptcy known as the "liquidation bankruptcy," in which non-exempt assets are liquidated and all debts are discharged.  In a typical Chapter 7 filing, there are not enough assets to liquidate, so the petitioner continues to keep his assets and his debts are "wiped out."  

The intent of the new legislation is that if a person files for bankruptcy, that he or she file under Chapter 13, in which a three-to-five year repayment plan is scheduled for at least part of the debt.

Procedural and Practical Changes Under the New Bankruptcy Laws

In practical terms, the following is a step-by-step rundown of filing procedures under the new bankruptcy laws:

	Consumers must take a financial counseling course within six months before filing with an approved counseling agency.  The counseling agency then issues a certificate which is submitted with the bankruptcy petition.
	If the petitioner earns less than his state's median income, he may be able to seek Chapter 7 protection.
	If the petitioner earns more than his state's median income, he will need to take a "means test" that the Court will use to determine whether at least part of the debts can be repaid. This means test will determine eligibility for a Chapter 7 or Chapter 13 bankruptcy.
	All persons filing under Chapter 7 and Chapter 13 need to take a financial management course from a Court-approved credit counseling agency before debts are discharged.

Next:  What Kind of People File for Bankruptcy, Anyway?