Even though I never plan to file for bankruptcy, I know that, as an educated consumer, it is important for me to stay updated on the most recent developments of bankruptcy law. After all, just like you, I never know when some emergency or unexpected event may occur in my life. Therefore, when President Bush signed some changes to law nearly a year ago, I sat up and listened. How about you?
This new law, which was called the 2005 Bankruptcy Abuse Prevention Act was signed into law on October 17 of 2005. The purpose of this law was to eliminate loopholes that were being taken advantage of by dishonest folks and made avoiding debt altogether much more difficult in bankruptcy proceedings for people. Because of past loop holes in the system, scammers were successfully avoiding having to pay debts that they really could have taken care of.
In order to eliminate this abuse, the 2005 law mandated that a bankruptcy attorney must analyze the financial situation of a person before he or she can even file for bankruptcy. By completing this evaluation, the attorney determines if the person can file for either Chapter 7 bankruptcy or Chapter 13 bankruptcy. With Chapter 13 bankruptcy, it is necessary to repay all debts that are secured. In addition, the person must pay off as much of his or her unsecured debts, such as the debt incurred on a credit card, as possible.
In order to determine how much a person can afford to pay on his or her debts, the attorney will take a look at that person’s income over the past six months. Even if the person is no longer employed, this income is considered a valid measurement of how much the person earns. The attorney then subtracts expenses such as insurance, rent, transportation, food, and child support. Keep in mind that the amount allowed for each of these is determined by the IRS based on nationwide averages. Therefore, it may not truly be what the person spends for each of these expenses.
If $100 or more remains after subtracting these expenses, the person must file for Chapter 13 bankruptcy rather than Chapter 7. In addition, the person must create a repayment plan that is to be followed for the next five years. The new law also mandates that a person files for bankruptcy in the state in which he lives. This alleviates the tendency of some scammers to file for bankruptcy in a state with more lenient laws.
Although this new law makes it much more difficult for a person to file Chapter 7 bankruptcy or to squirm out of debt, it is helpful for the honest consumer who simply found himself in a bad situation. This is because the new law does not allow college savings plans or retirement plans to be used toward repayment of debts and are not listed as assets. In addition, it will lower the overall costs of borrowing money as the risks for lending become less and less.
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{ 2 comments… read them below or add one }
You are a very smart person! I never would have thought about it this way.
I've been included in taxations for lengthier then I care to admit, both on the private side (all my employed life!!) and from a legal point of view since satisfying the bar and following tax law. I've furnished a lot of advice and corrected a lot of wrongs, and I must say that what you've put up makes impeccable sense. Please persist in the good work – the more people know the better they'll be equipped to handle with the tax man, and that's what it's all about.