Changes in Personal Bankruptcy Law

The majority of the changes in the Bankruptcy Abuse Prevention and Consumer Protection Act affect everyone who files for bankruptcy.

Bankruptcy law brings about a plan that allows a debtor to come to a decision on his debts by splitting up his assets among his creditors. It is a legal process in which a person affirms their inability to pay their creditors.

Crucial Changes:
One of the most crucial changes to the reform bill restricts consumers from deciding which type of bankruptcy they want to file. Under the new law, any person with an income that exceeds the median income of their state, may be forced into Chapter 13 bankruptcy.

Another of the changes maintains that people who plan to file for bankruptcy protection must get credit counseling from a government-approved organization within 180 days before they file. They must also complete a debtor education course to have their debts discharged. Credit counseling must take place before you file for bankruptcy while debtor education must take place after you file.

Means Test:
Under the new bankruptcy law, bankruptcy applicants who intend to file under Chapter 7 must meet certain eligibility requirements as part of a means test. All individuals must have their income and expenses evaluated against a means test which determines eligibility for Chapter 7 and Chapter 13 bankruptcy, the two most common bankruptcies. The numbers 7 and 13 refer to different chapters of the US Bankruptcy Code.

Under the new law, if you file for Chapter 7 bankruptcy, most of your unsecured debts are written off within 90 days of filing while Chapter 13 is a repayment plan, in which you set up a three or five year schedule with your creditors.

The new rules make it more difficult to declare Chapter 7 bankruptcy, which forgives the debt while Chapter 13 sets out a settlement plan.

With Chapter 13, the bankruptcy stays on your credit report for seven years while the bankruptcy under Chapter 7 will stay on your credit report for 10 years.

Traditional and Roth IRAs:
Under the new law, up to $1 million of the assets an individual holds in traditional IRAs and Roth IRAs, or a larger amount settled on by the bankruptcy court, will be free from their bankruptcy estate. The new law also enforces the unlimited protection that exists at this time for 401(k) plans, 457 plans, 403(b) plans, governmental plans and tax-exempt organization retirement plans.

Other changes under the new bill have negatively affected some individuals, such as how their property is valued and how long they must live in a state to use that state’s bankruptcy exemption laws. Changes were also made to how auto loans are treated in both Chapter 7 and Chapter 13 bankruptcy.

Rebuilding:
The primary intent of the laws of bankruptcy aim to equip the debtor with a fresh start by relieving most of the debt. One of the most important tasks after bankruptcy is to rebuild good credit. After filing for bankruptcy, you may be surprised by the number of requests available to you from credit card companies. While there are certain credit cards you will not be able to get, there are just as many companies that will supply credit specifically to those that are having financial troubles, in particular secured credit cards, with a credit card limit equal to the amount of your deposit.