Springfield Business Journal Articles


What Does the New Bankruptcy Act Mean to You?

President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Act") on April 20, 2005. The Act makes dramatic changes in the bankruptcy laws, some of which apply to Illinois citizens more than others.

The Act is primarily the result of a massive lobbying effort funded by the credit card industry, and, not surprisingly, it can make credit card bills more difficult to discharge. It does this by forcing more debtors into Chapter 13 bankruptcy which includes a multi-year payment plan rather than Chapter 7 bankruptcy which discharges debts and allows the debtor to start with a "clean slate."

According to a White House press release, "Under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts. Those who fall behind their state's median income will not be required to pay back their debts. This practical reform will help ensure that debtors make a good-faith effort to repay as much as they can afford. This new law will help make credit more affordable, because when bankruptcy is less common, credit can be extended to more people at better rates." It is hard to imagine how credit can be extended to any more people in America. Hopefully, the better rates will materialize.

Before you can file for bankruptcy, the Act will require you to attend debt counseling through an approved non-profit credit counseling agency. You must attend the counseling in the six month period before you file your petition. Counseling you attended a year ago will not be sufficient.

The change which has received the most media attention and may affect the most people is a new "means" test. If your annual income is at or above the median income for your area of residence and your "disposable" income over 60 months is greater than $6,000, then a creditor, the bankruptcy trustee or the court can stop you from receiving a discharge of your debts under Chapter 7. Although official numbers will be issued, according to an AP news article, the median household income in Illinois in 2003 was $45,607. In determining your "disposable" income, the courts must now use the living standards test that the IRS uses to determine what is reasonable to pay for rent, food and other living expenses. As you can imagine, the IRS living standards test is quite stringent.

The Act can also force debtors to pay higher amounts on secured debts. For example, if the market value of your car is only $3,000, but you owe $5,000 on it, it is possible under the current law to "cram down" the debt on the car to the market value of $3,000. Under the Act, it is more likely that you will have to repay the entire debt, rather than only the secured portion.

Another change that has received a great deal of attention is the change in homestead exemptions. This change will only affect Illinois citizens, however, if they move out of state. Each state has its own set of exemptions under bankruptcy law. Some states allow you to choose between the state exemptions and the federal exemptions. Illinois requires you to use the state exemptions. The Illinois exemptions are very stingy, particularly the homestead exemption which is only $7,500 ($15,000 for a married couple who both file bankruptcy). Many states have a significantly higher homestead exemption, and some states, most notably Texas and Florida, have an unlimited homestead exemption. Therefore, debtors have often moved to Florida in particular, put all their assets into a home and then filed for bankruptcy. The Act places a cap on the homestead exemption of $125,000 for certain debtors such as those convicted of securities fraud. Also, a debtor will not be able to use the state homestead exemption until he has been a resident of the state for two years. If the debtor files within the two year period, he will be forced to use the exemptions from his prior state of residence. Therefore, an Illinois debtor cannot even increase his homestead exemption to the federal $125,000 cap during the two year period.

There are many other changes under the Act. The effective date of the Act is generally 180 days from April 20, 2005. Therefore, if you have been considering bankruptcy, you should talk to an attorney as soon as possible to determine whether you are better off under current law and, therefore, should file now. He who hesitates may be lost.
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