Wednesday, March 16, 2005

What Effect Will The Proposed Bankruptcy Reforms Have on Me?

The United States Senate recently approved legislation that, if signed into law, would be the most extensive reform in 25 years. The bankruptcy bill that just passed the Senate and is pending in the House would affect between 30,000 and 210,000 people a year, largely by forcing them to opt for Chapter 13 bankruptcy, where some repayment is required, rather than Chapter 7, which erases debts altogether.

The main features of the proposed legislation which would affect debtors are the following:

  • Your ability to file a Chapter 7 Bankruptcy would be "needs based." There would be a current monthly income requirement that would have to be satisfied before one would qualify for filing. The figure currently being looked at in the committee is $6000 per month. Apparently anyone with a monthly income above that would not be allowed to file Chapter 7 and could only do a Chapter 13.
  • The bill would create a "means test." The court would be allowed to convert a Chapter 7 case to a Chapter 13 based on income and other factors. Under existing law, such a conversion only takes place if the debtor asks for it.
  • The homestead exemption would be capped at $100,000.00 if the home was acquired during the two year period preceding the filing of the bankruptcy.
In essence, bankruptcy filers with incomes above their state’s median income and who have the ability to repay $100 a month over five years — a total of $6,000 — would have to file under Chapter 13. The bill shields retirement benefits up to $1 million, but it also states that child support, alimony, student loans and most tax obligations cannot be wiped out by bankruptcy.

Nearly 1.6 million people filed for bankruptcy in 2003. The new reform legislation will apparently effect only a small number of the people who file for bankruptcy each year, the ultimate consequences of the proposed legislation will remain unknown until the final version is signed into law.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

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