Bankruptcy has been the refuge of many people with high credit card and other debts that they can’t repay. It’s provided them with a means of getting their financial houses in order and getting on with their lives. New federal bankruptcy laws that took effect in 2005 have made it tougher to discharge credit card debt through bankruptcy, particularly for middle and upper income earners. These changes are supposedly aimed at curbing abuses of bankruptcy protection and promoting financial responsibility, but many feel the new laws were passed to benefit credit card companies.
Chapter 7 and Chapter 13
The Bankruptcy Abuse Prevention and Consumer Protection Act contains several provisions, most notably language curbing the use of Chapter 7 bankruptcy and instead promoting the use of Chapter 13 bankruptcy to settle debts.
In short, a Chapter 7 bankruptcy discharges some forms of debt while allowing debtors to keep some forms of property, such as their house or car. Assets debtors filing a Chapter 7 bankruptcy are allowed to keep vary from state to state. Chapter 7 bankruptcies have historically been used to help discharge credit card debt and debt from medical bills.
A Chapter 13 bankruptcy allows debtors to keep some exempt property, but requires the sale of other assets and also requires debtors to pay off some of their debts under a repayment plan before discharging the remainder.
Creditors have complained that debtors had been abusively using Chapter 7 to discharge debt that they could have repaid under Chapter 13. Arguing that this threatened the solvency of banks and other lenders, such as credit card companies, the financial services industry lobbied Congress to make filing Chapter 7 more difficult.
Prior to the new law, about 70 percent of Americans who filed for bankruptcy did so under Chapter 7. A great number of these debtors did so to discharge credit card debt. The new law has sharply reduced the number of people filing for bankruptcy under Chapter 7.
Means test, other provisions
The new law makes it tougher to file Chapter 7 bankruptcy by imposing a strict means test for debtors wishing to file. Under the new law, households earning more than the median income for their state are required to file Chapter 13 bankruptcy instead. The court ascertains debtors income by requiring debtors to document their income with pay stubs and tax returns. In the past, debtors were not required to submit this information to the courts.
The new bankruptcy law didn’t stop at just shifting Chapter 7 filers to Chapter 13, however, The new law also made some changes to Chapter 13. Under the new law, debtors are now required to make payments on debts for five years rather than three. This means debtors must now pay back a greater percentage of their credit card debt. Car loans purchased within 30 months prior to the Chapter 13 filing must now be paid back in full. In the past, bankruptcy courts could impose lower payments and interest rates.
The Bankruptcy Abuse Prevention and Consumer Protection Act also mandates that debtors filing for bankruptcy must undergo debt counseling at their own expense six months prior to filing for bankruptcy. The intended goal of this provision is to encourage debtors to pay back their loans. After filing for bankruptcy, debtors are required to take a financial management training course.
Another key element of the Bankruptcy Abuse Prevention and Consumer Protection Act regarding credit cards are new regulations concerning minimum monthly payments. Under the new law, credit card companies are now required to ask cardholders to pay a larger amount of the principal on their credit card back each month in the form of minimum monthly payments. This is expected to speed cardholders’ repayment of their debt, discourage excessive borrowing, and help cardholders keep from getting trapped on the debt treadmill of high interest rates. The credit card companies are also now required to inform cardholders about how long it will take for them to repay their credit card debt if they only make minimum monthly payments.
Prior to filing for bankruptcy, debtors should consult with an accountant or bankruptcy attorney to ascertain their status with regard to Chapter 7 means test requirements. Debtors should also consult with their lenders to see if they can work out a viable repayment plan, as attorneys’ fees related to bankruptcy proceedings can be quite expensive now, thanks to the extra work the new bankruptcy bill requires of them.