After eight years of trying, Congress passed, and the President has signed, new bankruptcy legislation effective October 15, 2005. It is sweeping and controversial, but it is not the end of bankruptcy. For most honest debtors whose income is limited, there may be no substantive difference between the old law and the new.  There is no doubt that, where changes were made, the law will benefit creditors more than debtors, but the overall affect of the law may be more neutral than many, at first blush, claimed.

     Below are some of the provisions included in the new Bankruptcy Code act that are different from the previous Code:

· To qualify for Chapter 7 (most debts discharged), the debtor must undergo a bankruptcy 'means test'.  If your income is greater than Virginia's median income for your family size, and if you can pay at least $6,000 over five years (i.e., $100 minimum a month), you will be required to file under Chapter 13. That Chapter requires you to repay at least a portion of your debts.

· If you purchased your car within 910 of filing, you will have to pay the full amount owed on your car loan. This regardless of the condition of the car. (In other situations, you can pay only what the secured property is worth. (This is a major change from the 'old' law. Debtors used to be able to 'buy back' a car now worth $3,000 for $3,000, even though the balance owing -- and that you overpaid for -- may be $10,000.

· Bankruptcy attorneys (that's us) must certify your financial statements to the court. We might be held financially responsible if the statements are false. That means that we will have to be much 'tougher' with you on verifying the information you provide. so you will understand why: we likely will charge more for your bankruptcy (and be leary of the attorney who undercuts in price) and will be demanding in terms of the documentation you must provide.

Here is another view of the above, but in more detail:

• Chapter 7 is limited.

  Under the law, there is a presumption that the debtor should file under Chapter 13 if - in a five-year plan - he or she or they can pay the lesser of (a) 25 percent of unsecured claims or $6,000 of unsecured non-priority claims, whichever is greater, or (b) $10,000. A Chapter 7 filing may be considered "abusive" if a Chapter 13 is reasonably possible.
  

• The determination of how much a debtor can pay will no longer be based on budget figures that you provide that come from real life experiences, but rather will be based on IRS guidelines for "reasonable and necessary expenses" based on charts and national and local averages.
  

• Social Security payments is excluded from the calculation of "current monthly income" for the purposes of the means test.
  
  

• Reasonable expenses specifically include funds needed to protect the debtor's family from domestic violence, actual expenses incurred in caring for elderly or disabled family members and private or public school tuition of up to $1,500 per year.
  
  
• The means test doesn't disqualify a debtor from filing Chapter 7 if that debtor's income is equal to or below the highest median income for a family of equal or lesser size in the applicable state.
  
  

• For debtors whose income exceed the amount calculated above, a creditor, a trustee, judge or any party in interest can bring a "means test" motion to convert or dismiss the Chapter 7 filing as 'abusive' under §707(b) of the Bankruptcy Code. The law does not require that the abuse be "substantial," which was the prior standard for bringing a §707(b) motion.
  

• Even if the debtor 'passes' the means test (that is, is not 'forced' to file Chapter 13), a second type of abuse motion can still be filed. There, the party objecting might argue that the debtor's filing was in bad faith or that the totality of the circumstances demonstrates abuse. This was rare under the old code and likely will be rare under the new code as well.
  
  

• While any party in interest can bring an abuse motion for debtors whose incomes are above the applicable median, only a judge, U.S. Trustee or bankruptcy administrator can pursue such a motion for debtors with incomes below the median. It sounds like a change, but it really is not. The trustee will typically bring the abuse motion (as in the past) in the appropriate circumstance.
  

• Under another provision of the law, if a trustee brings a successful motion for dismissal or conversion, the debtor's lawyer may be required to reimburse the trustee for costs and attorney fees, and may face a civil penalty if the court finds that the attorney violated Bankruptcy Rule 9011. You can see why attorneys will be quite cautious in filing bankruptcies.  See below paragraphs for more.
  

• On the other hand, the court may award costs to the debtor for contesting an unsuccessful motion to convert a Chapter 7 bankruptcy, if the court finds the motion violated Rule 9011 or was intended to coerce the debtor into waiving rights under the Bankruptcy Code. Small business creditors with claims of less than $1,000 are exempt from this sanction.
  
  

• Attorneys may be liable in certain circumstances.

  Under the bill, an attorney's signature on a bankruptcy petition certifies the accuracy of the petition and related schedules. The signature further indicates the attorney has investigated the circumstances that gave rise to the petition, has determined the petition is well-grounded in fact and is warranted by existing law and has no knowledge that the information in the bankruptcy schedules is incorrect. That can be a lot of work, and certainly will be reflected in the fees that attorneys will charge.
  
  

  The bill would also require attorneys to certify a debtor's ability to make payments under a reaffirmation agreement.
  
  

• Fewer debts can be discharged.

A debt will be presumed nondischargeable if it is for luxury goods costing at least $500 and purchased within 90 days before filing, or for aggregate cash advances of at least $750 incurred within 70 days of filing. Previously, debts for luxury items and cash advances of more than $1,075 incurred within 60 days of filing were presumed to be nondischargeable.

The law also limits the previously nicknamed Chapter 13 super-discharge by making nondischargeable the following debts in Chapter 13:

• Fraudulently obtained credit card debts.
  
  
• Income tax debts that are the result of tax fraud or willful tax evasion, or if the debtor never filed tax returns. (Some of these were previously dischargeable.)
  
  
• Loan repayments to a debtor's retirement plan.
  
  
• Debts incurred to pay state or local taxes.
  
  
• Debts incurred for restitution or a criminal fine related to the debtor's conviction of a crime.
  
  
• Debts fraudulently incurred while acting in a fiduciary capacity.
  
  
• Debts for restitution or damages awarded in a civil action against the debtor because of willful or malicious injury that caused personal injury or death.
  
  

The law also expands the number of student loan debts that are nondischargeable, extends the time within which a debtor who has received a Chapter 7 discharge may not receive another from six to eight years, and bars a discharge in Chapter 13 if the debtor filed under Chapters 7, 11, or 12 within the previous four years, or filed another Chapter 13 petition within the previous two years.

• Mandatory credit counseling.

  Debtors must participate in a credit counseling course within 180 days before filing for bankruptcy. Further, the debtor cannot obtain a discharge unless he or she completes a personal financial management course after filing.  This counseling can be provided in person, by phone or Internet.
  

  Debtors will be exempt from this provision if the trustee in their district determines that adequate counseling isn't available.
  

• New disclosure requirements:

Tax returns must be provided.

A Chapter 7 debtor must provide a tax return for the most recent tax period to the trustee at least seven days before the first creditors' meeting, and to creditors when requested.

In a Chapter 13 case, the debtor must turn over tax returns for the prior four years when requested by a party.

A debtor must also provide:

• Copies of pay stubs for income received within 60 days of filing bankruptcy.
  
• An itemized statement of monthly net income.
  
• A detailed statement disclosing any "reasonably anticipated" income and expenses changes for the one-year period following the bankruptcy filing.

• Chapter 13 debtors will be required to file an initial statement based on the preceding tax year and then a projected statement for every year during the plan.

•  Chapter 7 debtors must prepare and file a statement that includes calculations under the means test, even if the means test doesn't apply because the debtor's income is below the national median.
  
  

• Notice given to creditors.

  A debtor must provide notice of filing bankruptcy to a creditor at the address the creditor prefers for receiving notice.
  
  

  Debtors' lawyers complain that this will make it very difficult to provide adequate notice. But failure to provide this address can have consequences. For example, if the creditor doesn't receive notice at the requested address and proceeds to repossess your car stating "we didn't know," the repossession of a vehicle won't be considered a "willful violation" of the automatic stay under the law.
  
  

• No more 'fair market value 'cramdowns' for secured claims. MAJOR CHANGE IN 13s
  

       The new law will make it impossible for Chapter 13 debtors to "cram down" a secured claim, such as a car loan. Previously, a debtor could force the amount he or she must pay down to the asset's current value, plus interest. But under the new law, the debtor will have to pay the entire amount of the loan. The provision applies to cars purchased within 2 1/2 years (910 days) prior to filing and to other consumer goods purchased within one year of filing.
  
  

       The law also makes it more difficult to enter into a redemption agreement - which a debtor might have considered under Chapter 7 - by requiring the amount of an allowed claim secured by personal property to be based on the retail "replacement value" of the collateral.
  
  

• Priority for alimony and child support increased.
  
  

       The law gives alimony and child support debts first priority under §507(a)(1) of the Bankruptcy Code, including support debts owed to a government agency. However, if a trustee is appointed, the trustee's expenses must be paid first.
  
  

       The law also conditions approval of a debtor's repayment plan on proof that he has paid all child support obligations due after filing for bankruptcy.
  

  
       Exceptions to the nondischargeability of certain debts for alimony, maintenance and support would be repealed. Property exempt from the bankruptcy estate will become liable for debts arising from support obligations.
  
  

       The automatic stay will be waived to allow collection of child support payments to continue during bankruptcy, and the bill prohibits the trustee from avoiding a transfer that is a bona fide payment of a support debt.

   
  

• Property Settlements Sacrosanct.
  

       It seems fair, but it may not be. Property settlement agreements cannot be modified in bankruptcy, period. In general, it seems reasonable that a party to a divorce who agrees to pay the bills as part of a settlement should not be able to turn around and discharge the debts, thereby sticking the other party with the payments.
  
       But what  if a party in good faith agrees to pay $100,000 worth of marital debt, does so for several years and then loses his or her job do to accident, illness or other catastrophe. Circumstances are such that he or she will never sufficiently recover to be able to pay more than subsistance living expenses. Under the old law, some relief was possible. Under the new law, the bankruptcy court cannot help.
  
  

• Homestead exemption capped.
  

  
       The value of a state homestead exemption is reduced (retroactively, it seems) to the extent that it is elected for assets that the debtor put into the home within 10 years before filing for bankruptcy with the intent to hinder, delay or defraud a creditor. (This probably doesn't affect Virginia filings, but we'll see.)
  
  

       In addition, debtors electing a state homestead exemption may not exempt any interest acquired within 1215 days (3.3 years) of filing which exceeds $125,000 in the aggregate, unless the value in excess of that amount occurs from a transfer of residences within the same state. The principal residences of family farmers will be exempt from this limitation. (This seems to be aimed at Florida residents, and should not affect Virginia householders.)
  
  

       The law also sets a firm $125,000 cap on homestead exemptions for individuals who are convicted of specified felonies - including violations of federal securities laws - or who commit criminal acts, intentional torts, or are guilty of willful or reckless misconduct that caused serious physical injury or death within five years before filing.
  
  

       The law requires a debtor to be a resident of a state for two years before he or she can take advantage of a homestead exemption. It also extends the definition of "debtor's residence" to include mobile homes or trailers. (This is designed to prevent people from moving to Florida and other high homestead exemption states, filing bankruptcy, and then returning to their true 'homes.')
  

   

  Evictions are not stayed.

  Evictions will no longer be stayed in bankruptcy if the landlord obtained a judgment of possession against the debtor before he filed bankruptcy. In addition, the automatic stay can be lifted if a landlord certifies that he is seeking a termination of a rental agreement based on illegal drug use, unless the debtor files a response and requests a hearing.