Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
Is filing bankruptcy the right thing to do?
Consequences to Filing for Bankruptcy
Bankruptcy is Not the Only Choice
There are two options available to those who have debt responsibilities beyond their control.
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Chapter 7 bankruptcy forgives all of your unsecured debt. (Unsecured debt is a debt that does not have collateral; for example, your credit cards.) Secured debt is not forgiven. Examples of secured debt would be a car or a home. Your car loan is secured by the car; your mortgage is secured by the home and or property.
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Chapter 13 bankruptcy allows you to repay a portion of your debts over a period of 3-5 years. You are placed on a strict budget. You are allowed money for food, housing, and a few other necessities. All remaining money left each month is requested by the court to pay your creditors. This repayment plan does not allow for new debt to be acquired. If you follow the budget you will receive a discharge of your debts and they will no longer need to be a concern. If you fail to follow the set budget, your bankruptcy cannot be completed and will be dismissed. You will find yourself back where you started and your creditors will once again have free access to try to collect the debt.
In filing for either chapter, any assets you might own will be taken to repay as much of the debt as possible. Some of the debt may be reaffirmed, meaning that you can claim responsibility for that debt and continue payments. Other debts such as child support, alimony, student loans, and most back taxes cannot be forgiven; they are called non dischargeable debts. Other non dischargeable debts also include purchases made prior to filing. This may include, cash advances of $750 or more made within 70 days of filing and luxury goods purchased within 90 days prior to filing. It is up to each bankruptcy judge to determine what constitutes a “luxury good".
There are some assets that can be exempt in a bankruptcy, for example, a certain percentage of the equity in your home. The state in which you reside will determine the amount of any assets you can keep.
Other Chapter Options in Bankruptcy
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Chapter 11, known as “reorganization” is used by businesses and by individuals whose debts are large.
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Chapter 12 was enacted by Congress in 1986 to meet the specific needs of financially distressed farm families, and to eliminate many of the barriers that farmers faced when filing under either a chapter 11 or 13. The primary purpose of a chapter 12 is to give family farmers facing bankruptcy a chance to reorganize their debts and keep their farms.
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A chapter 12 bankruptcy protection will reduce the capital gains tax burden for farm assets sold as part of the reorganization plan. This will allow farmers to sell grain, livestock, and other farm property to generate cash flow essential to the maintenance of a farm operation, and essential for debt repayment.
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was signed into law by President Bush on April 20, 2005. The intent of this bill was to create a more fair playing ground for debtors and creditors. For the debtor however, this bill made filing more expensive and discharging debts more difficult. Debtors are required to obtain financial counseling prior to filing. Those filing chapter 13 will be required to receive finance education in addition to the financial counseling. This counseling and education will not be free. In order to file for a chapter 7 debtors will be required to pass a “means test.” This is a test to see if your income falls below the area median income. If it does, you may qualify for a chapter 7. If it does not, you will not be able to file a chapter 7, and will be encouraged to file a chapter 13. The consequences of filing for bankruptcy will be determined by the debtor’s financial situation and their reasons for filing.
To file bankruptcy, fees are required. The filing fee is typically $200. The lawyer fee can start at approximately $500. Remember, these are approximations. Under the new Bankruptcy Law of 2005 these fees will increase.
Is filing bankrutpcy the right thing to do?
Not everyone who is in a lot of debt needs to declare bankruptcy. It may just be a matter of getting your finances in order. Re-evaluate your debts; will you be able to take care of the debt through hard work and discipline? Refer to the previous section about managing your debt. Consult a financial counselor or consumer credit counseling service one you trust to give you honest advice. You can also consult a lawyer. Research a lawyer just as you would a financial counselor. Bankruptcy lawyers are not required to have training in financial management, some may be out to make money, not to help you make the right decision.
Consequences to Filing for Bankruptcy
Credit report: Bankruptcy will stay on your credit report for up to 10 years. Every time your credit is checked the bankruptcy will appear and could hinder your getting another loan, job, or even a place to rent. Bankruptcy labels you as a financial risk to creditors. Creditors, landlords, and employers need to know of your financial responsibility.
Because of the damage done to your credit, you may not be able to get a loan with a reasonable interest rate for quite some time. You may need to plan on using cash for purchases. You can rebuild your credit, but this will take time and discipline. If you do not change your financial habits after declaring bankruptcy, you increase the chance of being in financial distress again. Under the new bankruptcy law there will be contingencies as to when you can re file for a chapter 13 bankruptcy. This is based on past bankruptcy filings and the outcome of those filings. To re file a chapter 7, you will have to wait eight years.
Bankruptcy is Not the Only Choice.
There are alternatives to bankruptcy. The first and most basic option is to contact your creditors and work out a debt repayment plan with them directly. Since the creditors want to be repaid they are, more often than not, willing to cooperate. Methods for debt repayment are discussed on this site. Savings are also important. It may take some time to build up a savings, but this can really make the difference when faced with an emergency. The old saying, “living from paycheck to paycheck” may become obsolete as many are having a difficult time making it from paycheck to paycheck. Take the time to explore this site and see what your options are for getting out of debt and for building up a savings account. There is power is self sufficiency. It is up to you and your family to make it happen!