An Overview of the New,
Tougher Bankruptcy Law
Bankruptcy is not something that most people want to think about. Unfortunately sometimes there is no other option. A new bankruptcy law that went into effect in October, 2005, however, is making that option more difficult.
Though the percentage of seniors who file for bankruptcy is relatively low, the number is increasing. A survey by the Consumer Bankruptcy Project at Harvard University found that in 2001 the number of seniors filing for bankruptcy had increased by 244 percent over 10 years. Two major causes of bankruptcy are debt for medical treatment or a death in the family; both are problems that seniors face.
There are two types of bankruptcy for individuals: Chapter 7 and Chapter 13. Chapter 7 allows debtors to keep some property (the exact property varies from state to state) while their other property is sold to pay off debts. Any remaining debt is cancelled, and the debtor is given a fresh start. Chapter 13 allows debtors to keep their house while they make a plan to pay off creditors.
The following are some of the changes in the new law that could negatively affect older Americans:
�The new law includes a means test to determine which chapter you can file under. If your income is above a certain level, you may not be able to file for Chapter 7. There is a formula to determine whether you can file for Chapter 7 or must file for Chapter 13. The means test won't affect very low-income seniors, but it could make it difficult for middle-income seniors to start over debt free.
�There are higher filing fees for Chapter 7. In addition, attorney's fees could be higher because filing is now more complicated.
�Under Chapter 13, there are higher standards for determining how much a debtor can afford to pay.
�Once you file for bankruptcy, the time period you have to wait before you can file again increased under the new law from 6 years to 8 years.
�The homestead exemption, which allows you to protect all or some of the equity in your home, is stricter under the new law, though it is unclear how it will be applied. Debtors can assert the homestead exemption if they have lived in the house for 1,215 days (3 years and 4 months) before filing. The federal exemption is $125,000, but states may have higher exemptions. If you bought the house within that time period, it isn't clear whether you can claim an exemption or not. Courts in different states have reached different conclusions on this issue.
�If you have lived in a state for less than two years, you can't assert a homestead exemption in that state. You must use the exemption from the state in which you lived the majority of time in the 180 days before the two-year period.
�You must undergo financial counseling at your own expense before and after you file for bankruptcy.
In addition to those changes, the new law does have some beneficial provisions for older Americans, including protecting retirement accounts up to $1 million and expanding the types of protected retirement accounts. For example, there is a new section of the bankruptcy code -- 541(b)(7) -- that provides unlimited creditor protection for all deferred compensation plans under section 457 of the Internal Revenue Code (IRC) and for all tax-deferred annuities under IRC section 403(b); a new section -- 522(b)(3)(C) -- that protects "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code"; and amendments to sections 541(b) & (c) that protect IRC section 529 college savings plans and Coverdell education accounts.
Please call us at 813-514-8180 to receive more information about filing for bankruptcy. We look forward to serving your legal needs!
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