In October 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) reformed Chapter 7 bankruptcy laws, imposing much more rigid restrictions and a more cumbersome and expensive filing process. Proving eligibility for Chapter 7 bankruptcy is now much more difficult. Chapter 7 permits liquidation of non-exempted assets to pay off debts and any remaining debts are discharged to give the debtor a financial clean slate. Under the changed laws, more people are forced to file for Chapter 13—by which a maximum five-year debt repayment plan is court-mandated instead. Here’s a summary of 2005 reforms and subsequent changes affecting consumers filing bankruptcy under Chapter 7.
Means testing — Previously, courts could determine Chapter 7 eligibility. Under the new law, the debtor must submit to a complicated means test. Monthly income must be under the median in Colorado. (The median fluctuates several times annually and is based on total household occupants). Higher-income earners can file for Chapter 7. However, if monthly income is above the median, and the court determines the debtor can afford to pay $100 per month toward debt, Chapter 13 must be filed instead.
Credit counseling — Debtors are now required to meet with an approved credit counselor within their judicial district for a ninety-minute credit counseling session during the six months period prior to filing bankruptcy.
Finance management education –– Before debts can be discharged, debtors must attend money management classes in a government-approved finance management education program, at their expense.
Federal tax returns — Debtors must now show proof of income by providing federal tax returns from the last tax year. Taxes for the previous year must be paid prior to filing bankruptcy.
Special circumstances — When circumstances beyond the debtor’s control are forcing bankruptcy, the court may permit filing Chapter 7 bankruptcy even if the debtor is not eligible according to the means test, or may waive some requirements. For example, credit counseling was waived for Katrina survivors.
Homestead exemptions — Under the new laws, for an individual residing in Colorado for less than two years, another state’s rules may apply to the bankruptcy. $60,000 is the maximum exemption and $90,000 for homesteads occupied by the elderly or disabled.
Living standards — The IRS now determines debtors’ reasonable rent, groceries, and other living expenses, and how much is to be allocated for debts. Contesting the decision involves setting a hearing with a judge, resulting in added delays and costs.
Lawyer liability — An attorney may now be financially penalized if the debtor’s bankruptcy filing information is inaccurate. This severe liability increase necessitates much more document validation work. Consequently, attorney fees for Chapter 7 cases have increased by as much as 100%.
Unpaid Child Support and Alimony — The law provides a system for prioritizing re-payments to creditors. The 2005 changes require that people owed unpaid child support or alimony by the debtor are prioritized over all other creditors.
Automatic Stay — Under the 2005 reforms, filing for bankruptcy no longer postpones or stops eviction actions, legal actions for child support, or divorce proceedings, driver’s license suspensions, etc.
Divorce settlements — The way family courts handle the discharge of marital obligations has been extensively changed. Now, all property divisions and nonsupport orders that benefit the debtor’s spouse are exempted from discharge under Chapter 7 bankruptcy.
Additional major changes to Colorado bankruptcy laws are not expected soon, but frequent minor changes to deadlines, fees, and court requirements often cause unaware filers to have their cases dismissed. And, the general information herein should not be viewed as legal advice. Filing for bankruptcy should be a last resort since it can damage credit standing for many years. If you are considering bankruptcy, I encourage you to schedule a free consultation with an attorney to ensure you’re maximizing your benefits and minimizing your damages.