The New
Bankruptcy Act
07/03/2006 Update on the New Bankruptcy Act:
Everyone has been trying to understand the new Bankruptcy Act. Many
questions will be answered only after a judge rules on the issue and it is
appealed to a higher court. Until that happens we can only guess at the answers.
To an extent, this is how it should be. The 1978 Bankruptcy Act is still
being interpreted by the Appellate Courts. The new Act is 517 pages long. It
will take a while for everyone to get used to it.
We can no longer predict what will happen on many issues. We do know that
bankruptcy is more expensive, requires much more
information and is less friendly to the debtors. Bankruptcy is no longer
friendly, easy and comfortable procedures. Congress now presumes you are dishonest.
Over 90% of bankruptcy debtors in this area are under the median income of the
state and will not have to worry about being forced into Chapter 13, but some
debtors will not be able to file Chapter 7 or 13: Those with seasonal or
unpredictable incomes, such as realtors, construction industry businesses
will have to wait for the slow season to file because
Acurrent monthly income@
(CMI), as defined by the Bankruptcy Act,
means the average income for the last 6 months.
Before I tell you about the New Bankruptcy Act,
I have to make two admissions:
- I am biased - I have read it from a debtors point of view. The banks
wrote it for their own benefit.
- I cannot do it justice - it is 517 pages long and some provisions will
have to be explained by the courts.
What you will read here are my opinions, some of which I may change later.
Check my links to other sites for other opinions.
- In order to get a discharge, you will have to be counseled twice by a
non-profit financial counselor who is selected by the US Trustee and who
gives the advice dictated by the US Trustee. The value of this service
is limited by the time taken - an hour and a half for credit counseling and
about 3 hours for the debtor education. Most debtors have no complaints
about the information given even though it is ineffective in preventing
bankruptcy.
- The time between bankruptcies has been extended from 6 to 8 years. You
will be required to suffer 2 more years before relief.
- You must produce the two most recent tax returns to the trustee for the
Chapter 7 and four returns for a Chapter 13.
Why would a creditor want to see your tax return? Would it be for your
benefit? And, what does a three year old tax return have to do with paying
today’s debts? If you have not filed a tax return recently, you will have to.
- The automatic stay which prevents creditors from harassing you or taking
your property, has been limited in 10 different ways.
- The Trustee can avoid (cancel and ask for back) a fraudulent transfer made
within 10 years, if made with the intent to defraud creditors 9 years in the
future. (That reminds me - I must give away some property so that I can
defraud creditors in 2017.)
- The New Bankruptcy Act creates provisions that are carefully separated
from reality.
- Debtors "current monthly income" is NOT his current monthly income, but
his AVERAGE monthly income for the last 6 months, ending the month before
filing.
- You will be average. Your monthly expenses will be set by the IRS. Your
housing expense for rent or mortgage and utilities in Sangamon County is:
- $616 for one or two person families
- $729 for a three person family
- $834 for a four person family
Be happy you don’t live in Chicago. The allowance there is 20% higher, but
much less than the increased cost of living.
- Your ownership cost for a vehicle is $475 and for a second vehicle $338.
- Operating expenses are $251 for one vehicle and $345 for two or more.
Apparently, the cost of fuel and the length of commute are being ignored.
The cost of food, clothing, etc., varies by family size and income. It
goes from far more than your income to far less, leaving plenty of money
left for debt payment.
You may have trouble filing a Chapter 7 if your income is above the median income
family in Illinois, which is about:
$42,995 for a one person family or $3,583 per month
$54,599 for a two person family or $4,550 per month
$64,178 for a three person family or $5,349 per month
$74,705 for a four person family or $6,225 per month
Allowance grows by $6,900 for each family number above four or $575 per
month.
Most bankrupts in our area are below these limits. Those above may have to
file Chapter 13.
The act virtually deletes the right of redemption - the right to
re-finance the collateral at its current value of a vehicle or other property.
The creditor did get the wholesale value of their vehicle under the old code. Now, they will get full retail value
even though they would get less than wholesale after repossession. The debtor will have a choice of paying too
much for an overpriced car or giving it up to purchase a beater for cash. The
reasonable solution is forbidden.
Conclusion
The Bankruptcy Act is full of provisions which work out
differently than intended. Creditors looking for a large increase in recovery
will be disappointed. Attorney fees and filing fees are higher. Debtors are more aggravated and suffer more. Some people will find bankruptcy is
unrealistic. If the house or vehicles are too expensive, they may have to be
abandoned. Some will find that suffering garnishment for life is better than the
remedy of bankruptcy relief. Many attorneys will get out of the business. New
ones come in without experience. The
rest of us will have to learn painfully, and to learn to live with it.
Will the new bankruptcy act reduce the number of bankruptcies? No. The three
main reasons for filing remain: illness, loss of income, and predatory lending
by credit cards. A fourth reason will soon become prominent.
Adjustable rate mortgage (ARMs) are starting to come due and interest rates are
rising.
Many people view bankruptcy emotionally - either for or against. But,
bankruptcy is just a tool for limiting the damage done by financial disaster.
Until now, it has favored giving the debtor a fresh start. The bankruptcy act
makes changes that are decidedly less favorable for the debtor. Will it give the
creditor a commensurate advantage? It is too early to tell.
|
