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A VERY BASIC
SUMMARY OF THE
NEW BANKRUPTCY LAW Under the new law
(the "Act"),
filing bankruptcy requires more paperwork, more supporting
documents, more court scrutiny, and -- because of the increased
complexity -- increased court costs and
legal fees.
Despite the self-serving rhetoric of politicians, the
underlying purpose of the Act was simple -- it was a political
payback to years of the credit card industry's intense lobbying and
hefty campaign contributions.
Although the credit card industry consistently earned
multi-billion dollar profits year after year, it sought to earn more money
from America's working-class and middle-class citizens. On October 17, 2005,
that industry reaped its reward from a grateful Congress and
President, and the misnamed "Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005" became fully effective. Because the
Act is
poorly worded and complex, it will take years of court decisions to interpret
certain
provisions and applications. Regardless, the following is a
basic summary of the new bankruptcy law, as it affects Oklahoma
consumer debtors.
CHANGES AFFECTING BOTH CHAPTER 7 AND
CHAPTER 13 BANKRUPTCY
Two Year Residency Requirement for Oklahoma Exemptions:
Under the old law a debtor who resided in Oklahoma 91 days prior to
filing bankruptcy was eligible to take advantage of Oklahoma’s
liberal asset exemptions. The new law increases the residency
requirement to 730 days. Anyone who moves to Oklahoma and files
bankruptcy before the 730 days residency limit must use the
exemptions of the state from which they moved. Some states
allow you to choose a set of default federal exemptions. Some
debtors may do better in bankruptcy under exemption laws of other
states or the federal exemptions. This law is designed to stop
people from moving to states like Oklahoma with generous exemptions
for the purpose of escaping debt in bankruptcy.
Homestead: If you have lived in your Oklahoma 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 Oklahoma 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 Oklahoma residents the time you lived in
a homestead outside of Oklahoma before moving here is not counted
toward your cumulative homestead residence in Oklahoma. If you
have not lived in your current and past Oklahoma 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:
(a) evidence of any payments you received within sixty days
prior to filing;
(b) your income tax return for the year prior to filing and
tax returns filed while the case is pending; and
(c) a showing of your monthly net income and how it was
calculated.
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 90 days
(up from 60 days) prior to filing bankruptcy, or if you took cash
advances of $750 (down from $1,225) within 70 days (up from 60
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.”
(1) If your income is less than Oklahoma’s published median
income for your size of family, then the means test does not apply
to you and your bankruptcy filing will not be challenged as a
substantial abuse unless other facts peculiar to your case indicate
abuse. Current median income amounts for Oklahoma will be
published before the new bankruptcy law goes into effect.
(2 If your family’s income is above the published median
income, then your family’s net income for bankruptcy purposes will
be calculated by a fairly complicated formula that uses IRS standard
expense figures based on both national and local standards. The
formula makes some allowance for your own special circumstances.
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.
(You could also retain the property securing the debt simply by
keeping your payments current, without even having to sign any
reaffirmation agreement). Most attorneys will sign these
statements at the client's 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." This
cost. in most cases, will be the retail value of an item of
comparable age and condition. 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
-- for example, debts arising 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 minimum 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” (or "cram 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, under
the old law, 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
retail replacement cost or value of comparable 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 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.
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