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The 2005 Amendments To The Bankruptcy Code

Bankruptcy and Family Law Attorney in Coeur d’Alene

Serving Coeur d’Alene & Kootenai County Areas, including Coeur d’Alene • Hayden

The new bankruptcy laws were actually amendments to existing bankruptcy codes. The reform of bankruptcy bill passed through Congress in April of 2005, and the changes it enacted really only made the process of filing for bankruptcy more complex; they didn’t remove the option of bankruptcy entirely.

Major Changes in the Amendments

The 2005 bankruptcy code amendments instituted a “means test” used to determine who may file for bankruptcy protection. The means test is an income-based yardstick by which the federal court figures if a filer’s income – including any income earned by a non-filing spouse – exceeds a level set by the amendments. This level measures whether you have the means to repay a major portion of your debts listed in your bankruptcy filing and is focused mostly on consumer debtors. The Chapter 7 trustee or the U.S. Trustee for the bankruptcy court can, in certain cases, seek to have cases dismissed for abuse of the bankruptcy system. Most individuals and couples who won’t pass the means test are still eligible for Chapter 13 bankruptcy protection, and, in fact, that is likely what such challenges to Chapter 7 filings via the means test are meant to do: cause people to file Chapter 13 and make repayments rather than seek a discharge in a Chapter 7 filing.

In order to pass the means test, a filer’s income for the last six months is extrapolated out to annual earnings and then compared to the filer’s state median income. If the filer’s annual income based on this formula is equal to or less than the median income for the filer’s state, then the filer is permitted to pursue Chapter 7 bankruptcy protection. If the filer’s income doesn’t pass the means test, the filer’s financial picture is looked at more closely to see if the filer qualifies to finance a Chapter 13 plan. Debtors who don’t qualify for Chapter 7 under the means test may contest the finding if there are extenuating circumstances, such as job loss, that aren’t reflected in the means test income requirements, namely, that the prior six months’ worth of income is no longer reflective of the filer’s current situation.

How the new bankruptcy amendments regarding current monthly income read:

11 U.S.C. 101 as effective 10/17/0510A) The term “current monthly income”–

(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor’s spouse receive) without regard to whether such income is taxable income, derived during the 6-month period ending on–

(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii); or

(ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii); and

(B) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent), but excludes benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in section 2331 of title 18) or domestic terrorism (as defined in section 2331 of title 18) on account of their status as victims of such terrorism.

This seems like a lot of intense legal terms, but, to break it down, it goes a little something like this:

Monthly income is defined as any money you receive – or you and your spouse receive if you’re filing jointly – regardless of whether that income is taxable income. The period of time they’re interested is the six months prior to your bankruptcy filing date. The amount of income includes any money paid toward your bills on your behalf. Social Security payments are not considered income.

Another area that has been contested regarding the amendments is whether or not a filer who owns his or her car can take the “ownership allowance” under IRS guidelines. Most courts concur that, if even one more payment remains on the contract for the car, that the filer can take the allowance. Recent court decisions have found that a filer who owes nothing on his or her car cannot take the allowance, so it is really up to the filer to decide if he or she wants to take out a small loan with the car as collateral in order to get the allowance. Some feel that this, then, creates a lien of ownership on the car, but that is just not so. In the end, until higher courts rule on this, it is unknown whether owing money on a car or not is beneficial.

One of the most aggravating aspects of the 2005 amendments is the fact that there is no clear definition of what constitutes income. Here’s what we do know: it is not relegated to strictly taxable income, and Social Security benefits do not count as income for this purpose. Some argue that money generated from the sale of assets, or that loans are not income, but the courts have not ruled on this matter. In fact, there are many issues that, hopefully, will be further defined by the courts as time goes on.

How The Amendments Affect Family Law Issues

The amendments to bankruptcy law concerning family support claims now covers support claims held by others, stresses that support claims are high priority for repayment under a Chapter 13 bankruptcy filing (and must be paid in full by your plan’s end); additionally, it is up to you to prove to the court that you are paying and current on support due after your bankruptcy filing date. Another change regards how debts arising from divorce proceedings are handled in a Chapter 7; specifically, they are no longer dischargeable. Divorce debts, however, are still dischargeable in a Chapter 13.

The bankruptcy amendments changed the amount of time that must pass between getting a bankruptcy discharge and filing for bankruptcy again. If your previous bankruptcy discharge was a Chapter 7, you may file for Chapter 7 again after eight years. If your previous bankruptcy filing was a Chapter 13, you may file for Chapter 13 bankruptcy again two years after the filing date of your previous Chapter 13, which is actually less time than the minimum length of Chapter 13 plans, which is 36 months. If your previous bankruptcy was a Chapter 7, you may file for Chapter 13 four years after the date of discharge in your Chapter 7 case. If you previously filed a Chapter 13 bankruptcy, you may file for Chapter 7 six years after your Chapter 13 filing date. If your previous case was dismissed, there is no waiting period. If you want to switch from a Chapter 7 to a Chapter 13 or vice versa, there is no waiting period.

The 2005 bankruptcy code amendments also made changes to a debtor’s duties during bankruptcy proceedings. By and large, the list below is providing documentation of what you say in the bankruptcy filing schedules. The requirements may seem overwhelming and are, without a doubt, time consuming and tedious, but most people are able to provide this information and get a discharge. Attention to detail is key here.

It is your responsibility to file schedules (including notices and statements of financial affairs), provide documents and other evidence regarding your financial state (like pay stubs, for instance) with 60 days of filing, make sure your statement of intention regarding secured assets is filed and perform those intentions, make sure statements of monthly income (itemized to show income calculations) are filed, make sure that any changes to your income are disclosed, to appear at the meeting with your creditors (the 341 meeting), get your certificate stating you’ve completed the required credit counseling sessions, not to keep property without reaffirming the debt on it or redeeming the debt on it, provide copies of your tax returns to the trustee (failing to do this will result in a dismissal of your case), provide identification on request, file your taxes every year while your case is pending (Chapter 13), make certain that investment interest on individual education retirement accounts is disclosed, file a statement of income and expenses yearly (Chapter 13), and to file a monthly statement of income (Chapter 13).

The important thing for you to remember is that each bankruptcy case and filing is as unique as the person filing it, and good representation throughout the process will be invaluable to you as you move through your case. Contact Advocacy Law Center, PLLC for a free phone consultation with one of our bankruptcy or family law attorneys.