Consumer Debts and Bankruptcy

Sweeping changes to the U.S. Bankruptcy Code will take effect on October 17, that will affect both the consumers and businesses however, individual cases involving consumer debts where more fundamental changes will occur.

As an individual with consumer debts, will I still be able to file bankruptcy?
Bankruptcy is still available however, many individuals whose income is over the median level with consumer debts in their home state may have more difficulty obtaining a Chapter 7 discharge.

What is the eligibility standard?
A case involving consumer debts, the bankruptcy trustee or any party may challenge an individual’s eligibility for Chapter 7 if, the debtor’s current monthly income (excluding specific deductions listed in the Code) is enough to pay a certain portion of the debtor’s obligations over five years. This formula some refer to as the “means test.”

However, if the debtor’s income is below the debtor’s home state’s median income or, is equal to, certain presumptions under the “means test” would not apply and, fewer persons would have standing to try having the bankruptcy dismissed. Most debtors whose income falls below this median level should be able to stay in Chapter 7.

The “Median Income Test” may prove more important in determining eligibility than the “Means Test.”

What happens if I fail the “Means Test”?
Chapter 7 can be dismissed if, presumptions of “abuse” apply or, with consent from the debtor’s it can be converted to another chapter, usually Chapter 13.

Are there other mandatory steps to be taken? What about credit counseling?
An individual in general, may not file bankruptcy without obtaining credit counseling within 180-days before filing from an approved nonprofit agency. In addition, an individual debtor may not obtain a discharge until he or, she has completed a personal financial management course.

May I still reaffirm certain debts?
Reaffirmation of certain debts in still allowed in Chapter 7; however, the creditors will have to show greater disclosure about the reaffirmed debt, and the debtor’s lawyer may have to certify to the court that it does not cause an undue hardship.

If I file Chapter 13, may I still “cram down” the amount of my car loans?
In some cases, a Chapter 13 debtor may no longer be able to divide a creditor’s claim into secured and unsecured portions. If the creditor has a purchase money security interest secured by an automobile purchased within two-and-a-half years (910-days) before, bankruptcy (or, other consumer goods purchased within one year before bankruptcy) the claim must be paid in full or otherwise the collateral surrendered. However, the pre-bankruptcy arrearage may be cured in the plan.

May I still claim my Texas Homestead?
A debtor generally needs to have lived in Texas for two years (730-days) before bankruptcy in order to claim Texas exemptions. Texas Homestead remains available for most debtors. For the debtors who have owned their Texas homestead for at least 1,215- days pre-bankruptcy, the Homestead Exemption remains unlimited however, for others there may be a $125,000 cap.

Are Retirement Accounts exempt?
Yes. A new law clarifies that a qualified IRA, up to $1 million plus certain eligible rollovers is exempt and excluded from the bankruptcy estate.

Am I more protected if my employer files Bankruptcy?
Yes. The amount of a priority wage claim has been increased up to $10,000 if, earned within 180-days of the employers bankruptcy.

What are the major changes to business bankruptcies?
Preferential transfers. In the ordinary course of business it should be more difficult to set aside preferential transfers that occur. Also, in business cases, preferences totaling less than $5,000 are not subject to attack. In addition, smaller preference cases must now be brought in the district where the defendant resides. This should leave arms-length trade creditors less vulnerable to preference claims.

Executive pay. There have been new restrictions placed on executive pay both pre- and, post-bankruptcy. Retention bonuses also, may have been limited or, at least subject to additional scrutiny.

Reclamation. Businesses who sold goods to a debtor on credit just before bankruptcy may have more protection under expanded reclamation powers and, by priority treatment in certain situations.


Small Businesses. What’s considered a “small business” now, have new definitions. 
The effect it will have on smaller Chapter 11’s is yet to be seen.

Chapter 12. Effective July 1, 2005, Chapter 12 is now permanent.