Bankruptcy Law Reform

Part 2 of CHANGES TO CONSUMER BANKRUPTCY UNDER THE 2005 BAPCPA REFORM

Lawyers are harder to find – and the ones who may take your case are much more expensive:
Due to all of the new requirements under the new bankruptcy law, attorneys will be required to spend much more time on each case, therefore making the cost for the consumer increase dramatically. Where the spiral will slacken is estimated to be $250 per hour times 30 hours. In addition, attorneys must now personally verify and vouch for all financial information provided by their clients. This means the attorneys must spend even more time on cases, and at personal liability and risk if the information is incorrect. This translates into fees, as Bankruptcy attorneys are not going to want take such a risk without being properly compensated by their clients.

We’ve already seen many attorneys who advertise bankruptcy as a major practice area have ceased taking new bankruptcy cases.

Many Chapter 13 Payments will be higher:
Under the old rules, Chapter 13 bankruptcy filers were required to pay all disposable income into their repayment plan, meaning that any money left from their income after paying actual expenses went to pay their creditors. However, the new system changes the definition of disposable income. As discussed earlier, disposable income is no longer based on the filer’s actual expenses; rather, it is based on the IRS “allowable expenses” chart. The IRS allowances are much lower than actual costs, because they are devised for use against “tax cheats” in an effort to get their attention. The last thing these figures are

intended to be is realistic. Also, remember that the “allowable expenses” are not subtracted from the debtor’s actual income at the time of the filing, but rather the average income for the preceding six months. Therefore, filers could end up being required to pay more into their Chapter 13 plan than they actually earn in a given month!

Net-net, this means that more consumers will likely be forced into Chapter 13 Bankruptcy than Chapter 7, and in the new rules many consumers will now be forced to repay more under the new Chapter 13 rules than in years past.

Change in property valuation:
Under the old system, the property of Chapter 7 filers was valued at what property could bring at auction. Therefore, items such as furniture, heirlooms, cars, and other personal property were assigned little value. This meant that property fell within the property exemptions allowed by most states, meaning the property could not be taken to repay creditors. However, under the new law, the filer’s property is valued at the cost of replacement at retail, taking into consideration age and condition. This new rule greatly increases the purported value of the property, making it

much more difficult for debtors to exempt their property from the trustee taking it to repay creditors – which means more furniture and other assets could be seized and sold under the new system.

Changes in exemptions for recent residents of a state:
Under the old system, filers were able to use the personal property exemptions of the state where they lived, as long as they had lived there for at least three months. Now, filers must live in their new state for two full years before they can use the state’s personal property exemptions. In order to use the homestead exemption of their new state, filers must have lived in the state for 40 months. This new law was designed to thwart bankruptcy filers’ moving to a state with more favorable exemption laws in order to file bankruptcy using that state’s exemptions. Net-net it is harder than before to file for Chapter 7 Bankruptcy protection, and the alternative solution of a Chapter 13 Bankruptcy is more costly than before.

If you missed it, read part 1 of bankruptcy reform.

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