ASSET PROTECTION UPDATES - New Bankruptcy Law

A REALLY SIMPLE SUMMARY OF THE NEW BANKRUPTCY LAW

The Bankruptcy Reform Act makes it much more difficult to eliminate (discharge) consumer debts through bankruptcy. Under the new law, filing bankruptcy requires more paperwork, more supporting documents, more court scrutiny, and because of the increased complexity, more legal fees. The new law will be effective for bankruptcy petitions filed on or after October 17, 2005. A few provisions of the new law, particularly those affecting the homestead exemption are in effect now. Because the law is so complex it will take years of court decisions to interpret important provisions and applications. The following is a really simple summary of those parts of the new law which will effect most consumers in Florida.

CHANGES AFFECTING BOTH CHAPTER 7 AND CHAPTER 13 BANKRUPTCY

Two Year Residency Requirement for Florida Exemptions: Under the old law a debtor who resided in Florida 91 days prior to filing bankruptcy was eligible to take advantage of Florida’s liberal asset exemptions. The new law increases the residency requirement to 730 days (between 2 and 2 ½ years). Anyone who moves to Florida and files bankruptcy before the 730 days residency limit must use the exemptions of the state from which they moved. This law is designed to stop people from moving to states like Florida with generous exemptions for the purpose of escaping debt in bankruptcy.

Homestead: If you have lived in your Florida homestead property for 3 years and 4 months (40 months) you can still protect unlimited amounts of homestead value in bankruptcy under the new law. If you moved from one or more Florida homesteads within the 40 months before bankruptcy, the time you resided in the prior homestead(s) is credited (or added on) to your time of residence in your present house. For new Florida residents the time you lived in a homestead outside of Florida before moving here is not counted toward your cumulative homestead residence in Florida. If you have not lived in your current and past Florida homesteads for 40 months prior to filing bankruptcy you may exempt up to $125,000 of homestead equity in bankruptcy. This homestead provisions of the new law does not diminish your unlimited homestead protection outside of bankruptcy in state court collection proceedings.

Credit Counseling and Debtor Education: Within six months prior to filing bankruptcy you must receive, at your expense, an individual or group credit counseling briefing from an approved nonprofit credit counseling service. The credit briefing may be in person, by telephone, or over the internet. In addition, you must complete an instructional course concerning personal financial management during your Chapter 7 or Chapter 13 case in order to get a bankruptcy discharge.

Production of Tax Returns and Other Documents: If you file bankruptcy under the Bankruptcy Reform Act you must provide additional documents with your petition including:

Failure to file these required documents within 45 days after filing will result in automatic dismissal.

Reduced Protection From Automatic Stay: If you file a Chapter 7 or Chapter 13 within one year of an earlier case being dismissed, the automatic stay in the second case terminates 30 days after your second filing unless you can show cause to extend the stay. Also, you cannot stop a residential eviction by filing bankruptcy after your landlord has a judgment of possession from a state court.

Presumption of Fraud for Luxury Purchases and Cash Advances. The new law makes it easier for a trustee or creditor to show that you fraudulently incurred debt prior to bankruptcy. If you purchased luxury goods worth $500 (down from $1,225) within 60 days (down from 90 days) prior to filing bankruptcy, or if you took cash advances of $750 (down from $1,225) within 60 days (down from 70 days) prior to filing there is a presumption that these debts are not dischargeable.


CHANGES AFFECTING CHAPTER 7 BANKRUPTCY

Means Test: Under the current law United States Trustees have been aggressively investigating Chapter 7 bankruptcy filings for what is known as “substantial abuse.” Substantial abuse is a term applied to people in Chapter 7 who have sufficient net income to pay a significant portion of their unsecured debts through a Chapter 13 plan. When the U.S. Trustee has successfully prosecuted Chapter 7 cases for substantial abuse the bankruptcy court has ordered conversion of the Chapter 7 case to a Chapter 13 repayment case.

The new bankruptcy law adopts objective criteria to evaluate when a Chapter 7 case involves substantial abuse. These objective tests are being referred to as the “means test.”

Simply stated, if your family’s net income after deducting the expense formula from your gross income is greater than a number between $100 and $166 you will be presumed to have flunked the means test. In that event there is a presumption of substantial abuse ( meaning you can afford to pay your debts), and you cannot file for Chapter 7 bankruptcy. Even if you flunk the means test you still have the opportunity to demonstrate to the bankruptcy court special circumstances which rebut the presumption of abuse and which warrant a Chapter 7 bankruptcy.

The means test of substantial abuse applies only to people whose debts are primarily consumer debts. If most of your debts were incurred to fund a business then the means test does not apply to you. In that event, you can file Chapter 7 regardless of your income and expenses unless other factors indicate that you are abusing Chapter 7.

Reaffirmation of Debts: The new bankruptcy law makes it more difficult to reaffirm, or keep, existing debt obligations. Under the old law you can reaffirm almost any debt so long as your attorney signs a statement that reaffirmation is in your interest. Most attorneys will sign these statements at the clients request. Under the new law, a debtor will have to prepare and file a statement of income and expenses with any reaffirmation application. If the statement indicates insufficient income to maintain the debt there will be a presumption that the reaffirmation is too burdensome financially. In such event, unless you can show the court in writing why you are able to comfortably reaffirm the debt the court may disapprove your reaffirmation agreement.

Redemption of Debts: Redemption involves paying off a debt secured by personal property (not mortgages) for the amount of the secured property’s current value even if the amount of the loan balance exceeds the property’s current value. For example, if you owe $10,000 on a car which is currently worth $5,000, you could redeem the car and own it free and clear by paying the creditor $5,000. The payoff amount under the old law is the personal property’s fair market value which is close to liquidation or garage sale values. The new law defines “value” for redemption purposes as your cost of replacing the personal property which cost, in most cases, will be full retail value. The new law makes redemption much more expensive.

Domestic Support Obligations and Property Settlement in Divorce: Domestic support obligations will have first priority in distribution to creditors. Property settlement obligations, dischargeable under the old law, are non-dischargeable under the new bankruptcy law.

CHANGES AFFECTING CHAPTER 13 BANKRUPTCY

Elimination of Super Discharge: Under the old law Chapter 13 bankruptcy can be used to discharge certain debts which are non-dischargeable in Chapter 7 including, for example, debts for late filed or fraudulent tax returns, debts for embezzlement or breach of fiduciary duty, and debts for civil fraud and misuse of credit cards. The new bankruptcy law eliminates your ability to discharge these debts in Chapter 13 although a few debts remain dischargeable in Chapter 13 which are not dischargeable in Chapter 7 such as debts from divorce property settlements or separation proceedings.

Disposable Income Definition: Chapter 13 requires that you pay all your disposable income to the plan for a minium term. Under the new bankruptcy law if your disposable income exceeds the applicable median income used in the Chapter 7 means test then “disposable income” for Chapter 13 shall be calculated under the same complicated means test formula used in Chapter 7 qualification.

Strip-down: Under the old law Chapter 13 bankruptcy could “strip-down” secured claims so that your bankruptcy plan pays over time only the current value of the secured personal property (not home mortgages) even if the current value of the property is less than the loan value. Strip-down is like a redemption with payment terms. For example, if you owe $10,000 on a car which is currently worth $5,000, your Chapter 13 plan pays the car lender only $5,000. Under the new law no strip-down of value will be allowed for motor vehicles purchased within 2½ years of filing or for debts secured by any other personal property incurred within one year of bankruptcy. Also, the strip-down value of a secured claim must be based on replacement cost or retail value of the property rather than its liquidation or garage sale value.

Plan Length: Under the new bankruptcy law if your income is above the applicable median income used in Chapter 7 means testing your Chapter 13 plan must either extend for five years or you must pay 100% of all unsecured and priority claims in a shorter period of time.

Tax Returns and Annual Financial Statements: The Bankruptcy Reform Act adds a requirement that Chapter 13 debtors must file their last four years tax returns early in the case. Also, upon request by any party or the judge a Chapter 13 you must file annual financial statements of income and expenses during your Chapter 13 plan.

Protection of Support Obligations: The new bankruptcy law includes a provision that a Chapter 13 plan will not be confirmed, and a discharge will not be granted, unless you are current in your domestic support obligations. Failure to keep current post filing support obligations is grounds for dismissal.