Bankruptcy's Fresh Start No Longer an Option for Many
From the Nolo.com Debt & Bankruptcy CenterA new law will keep many people from wiping out their debts in Chapter 7 bankruptcy.
Updated July 9, 2001
Congress has passed legislation that will bar some people from filing for Chapter 7 bankruptcy -- the kind of bankruptcy that lets people over their head in debt sell off some of their assets to pay creditors, keep the rest, and cancel much of the remaining debt. The new law will also make it harder to wipe out some kinds of debts, including credit card debt. The credit card industry lobbied hard for the new law and donated millions to members of Congress and to George W. Bush's presidential campaign.
Both the House and Senate have passed nearly identical bills; now the differences will be ironed out by a congressional committee. President Bush will most likely sign the resulting bill.
This article summarizes some of the major changes that affect consumers who hope to file for Chapter 7 bankruptcy. However, many changes in the new law affect both Chapter 7 and Chapter 13 bankruptcy filers.
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New Means Test to Determine Eligibility
| Losers: | People who have above-average income and could afford to pay at least $100 per month to creditors. |
The new law will prohibit some people from wiping out their debts by filing for Chapter 7 bankruptcy. This is a huge change. Under current law, most people can wipe out their debts as long they can't afford to pay off a large portion of it in Chapter 13 (repayment) bankruptcy.
Under the new law, anyone whose household income is more than their state's median won't be allowed to file for Chapter 7 bankruptcy if their monthly income, less certain payments they're already making plus set amounts for expenses, leaves enough to pay off a small amount of their debt. The amount debtors can subtract for many expenses (like housing and transportation) has nothing to do with their actual expenses -- they must use the figure set by the IRS for their region of the country.
People who don't qualify for Chapter 7 will be pushed into Chapter 13 bankruptcy, which requires debtors to come up with a three- to five-year repayment plan.
More People Will Lose Their Homes
| Losers: | People who have lots of equity in their homes and live in a state that protects most or all of it. |
People who are current on their mortgage payments when they file for Chapter 7 bankruptcy may or may not lose their homes -- it depends on the amount of equity they have and on state law. For example, if a state allows debtors to keep $50,000 of equity in a home (this is called the homestead exemption), someone who has $40,000 of equity is safe. More than $50,000 equity, though, and the home may have to be sold to pay creditors.
The House and Senate versions of the new bankruptcy law differ on this point. The House bill limits state homestead exemptions to $100,000 if the debtor bought the home within two years before filing for bankruptcy; the Senate version has a $125,000 cap. President Bush opposes any cap; his home state, Texas, imposes no cap and lets debtors keep a house no matter how much it's worth.
Bankruptcy Court Procedures Get More Complicated
| Losers: | People who want to handle their own bankruptcy case. |
Currently, the process for most Chapter 7 bankruptcy filers consists of filing some papers with the bankruptcy court and attending one hearing. Creditors can challenge the bankruptcy only in a few situations. The new bill, however, greatly increases the number of situations where a creditor can challenge a case. Many debtors will need to hire an attorney.
Fewer Debts Wiped Out
| Losers: | People who recently bought luxury goods or received cash advances, people with private student loans, some people with child support obligations that aren't court-ordered. |
Some debts can never be wiped out in Chapter 7 bankruptcy. The new law expands this list of debts to include:
- Debts of $250 or more incurred to buy luxury goods or services (such as vacations and expenses for hobbies or entertainment) shortly before filing. The Senate version of the bill imposes a $750 limit. Under current law, the limit is $1150.
- Cash advances of $750 or more incurred shortly before filing. Under current law, the limit is $1,150.
- Student loans that are not guaranteed by the federal government. Most student loans, however, are federally guaranteed.
- All child support and alimony debts. Under current law, some child support obligations can be cancelled if they are part of a divorce agreement, but not ordered by the court.