NEW BANKRUPTCY CODE, HOW WILL IT IMPACT THE CONSUMER DEBTOR IN NORTHERN VIRGINIA?

Congress recently enacted, and the President signed into law, new bankruptcy legislation, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The new bankruptcy legislation will become effective on October 17, 2005. Although it cannot be predicted with certainty how consumer debtors will be impacted by the new bankruptcy act, it is clear that most of the new bankruptcy provisions do not favor debtors, but rather are creditor oriented, and therefore any impact on consumer debtors is likely to be negative.

Under the current Bankruptcy Code a debtor has a choice between filing a bankruptcy petition under Chapters 7, 13, and 11 (for a discussion of the difference between the relief available under Chapters 7 and 13, see Resource Links, Bankruptcy Questions and Answers, John H. Williamson, Chapter7, Chapter 13). For some debtors Chapter 13 is a better choice than Chapter 7and a bankruptcy attorney will often recommend Chapter 13. Debtors filing bankruptcy petitions in the Eastern District of Virginia choose Chapter 13 approximately 15-20% of the time. For most debtors Chapter 7 is the better choice. Perhaps the most significant provisions in the new bankruptcy act are provisions which will restrict access to Chapter 7, and require some debtors to file under Chapter 13 (or have their bankruptcy case dismissed), although they would prefer to file under Chapter 7. The new Bankruptcy Code will impose a “means test” on all debtors filing bankruptcy petitions under Chapter 7 whose income exceeds the median income in Virginia for a family of the same size as the debtor‘s family. The median income is the median family income calculated and reported by the Bureau of the Census in the year the bankruptcy petition is filed, and if not reported for the current year, adjusted annually after the most recent year available to reflect any change in the Consumer Price Index. The “means test” is designed to determine the extent of the debtor’s ability to repay general unsecured creditors out of future income over a five year period, which is to say, the ability of the debtor to repay these debts under a Chapter 13 plan over 60 months.

The application of the means test starts with the determination of the debtor’s “ current monthly income”, which is the debtor’s average monthly income from all sources, excluding Social Security income, for the six month period preceding the date of the filing of the bankruptcy petition. It includes regular contributions to household expenses made by other persons, such as the debtor’s spouse, even if a joint bankruptcy petition is not filed. The debtor’s yearly income is his or her current monthly income times 12. The threshold test is whether the debtor’s current yearly income is more than the median income in the debtor’s filing state ( i.e. Virginia). If the debtor’s income is equal to or less than the median income in Virginia, for the debtor’s family size, the means test is not applied, and the case can proceed as a Chapter 7 case. The test is not the median income in Fairfax County or Northern Virginia, but the median income in the entire state. Incomes are higher in Fairfax County and Northern Virginia than in the rest of the state and therefore the test will likely apply more often to Fairfax County and Northern Virginal residents (although statistics have shown that individuals filing bankruptcy petitions generally have incomes below the median incomes in their communities). The median income for a family of two in Virginia in 2004 was $53,984 (for a family of three it was $59,185 and for a family of four it was $67,341). The Census Bureau reports separate median income figures for families with one wage earner and families with more than one wage earner and it is not clear which figures may be used.

If the debtor’s current yearly income is above the median income for Virginia, the next step in applying the means test is to reduce the debtor’s average monthly income by allowable living expenses and other allowable deductions from income, to determine the debtor’s available disposable or discretionary income to repay general unsecured creditors over a five years or a 60 month period. Expenses and other deductions are projected over the 60 month period following the date the bankruptcy petition is filed. Allowable deductions available in determining disposable income under the means test in the new Bankruptcy Code are more limited and not as generous as under the current Bankruptcy Code. Most living expenses allowed under the means test are limited to expenses allowed under standards developed and used by the Internal Revenue Service in negotiating the repayment of delinquent tax obligations. Some of these IRS standards are national in scope, such as allowances for food, clothing, personal care, and entertainment. Other standards are regional in nature ( i.e. Fairfax County or Northern Virginia standards), such as allowances for housing and transportation. The debtor can deduct his or her actual reasonable living expenses in expense categories recognized by the IRS, as “other necessary expenses”, but as to which no specific allowance has been set by the IRS. Expenses involving repayment of secured debt and priority unsecured debt are deducted separately . 1/60th of all secured debt that will become due in the five years after the filing date of the bankruptcy petition can be deducted (including arrearages on secured debt due at the time of filing). 1/60th of all priority unsecured debt, including arrearages, can be deducted. For most consumer debtors “priority unsecured debt” means taxes, alimony, and child support. In addition, expenses for necessary health insurance, disability insurance, and contributions to health savings plans can be deducted. Continued expenses for the care of an elderly, chronically ill or disabled member of the debtor’s household or a member of the debtor’s immediate family (including parents, grandparents, siblings, children and grandchildren of the debtor); and continued contributions to tax-exempt charities, up to 15% of the debtor’s gross income may be deducted. “Continued” means the debtor must show a history of such expenses at the time a bankruptcy petition is filed. The debtor may deduct up to $1,500 per year for the expenses for a dependent minor child to attend a private or public elementary or secondary school. Repayment of general unsecured debt due at the time of filing cannot be deducted, for the very purpose of the means test is to determine how much income will be available to repay such debt after the allowable deductions outlined above. The amount of monthly income remaining after all allowed deductions from income have been taken constitutes the debtor’s available disposable income to repay general unsecured debt. If this disposable income is $166.67 per month or more ( greater than$10,000 over 60 months), the means test is satisfied and the debtor’s Chapter 7 case is subject to dismissal or conversion to a Chapter 13 case (if the debtor so elects). If the disposable income available is $100.00 or less per month ( $6,000 or less over 60 months), the means test fails and the debtor's case can proceed as a Chapter 7 case. If the disposable income available is between $100 plus and $166.66 per month (between $6,000 plus and $10,000 over 60 months), the outcome depends on the amount of the debtor’s general unsecured debt, which usually means credit card debt. If the debtor’s disposable income is $100 plus and less than 166.67 per month the test is whether or not the debtor’s disposable income can repay 25% or more of his or her general unsecured debt If the available disposable income can repay 25% or more of the debtor’s general unsecured debt, the debtor’s Chapter 7 case must be converted to Chapter 13 or dismissed. Again, if the debtor’s disposable income is over $166.66 per month the case will always either be converted to Chapter 13 or dismissed. Debtors with general unsecured debt of $24,000 or less may have their Chapter 7 case dismissed or converted to Chapter 13 if they have any disposable income over $100. Debtors with general unsecured debt greater than $39,998.40 would only have their case dismissed or converted if their disposable income is greater than $166.66 per month.

Every debtor filing a Chapter 7 petition under the new act must file a statement with the Court showing how the debtor calculated and applied the means test to his or her case and serve it on every creditor. Most Chapter 13 plans under the current Bankruptcy Code are three years in length or less. Under the new Bankruptcy Code the means test is also applied to all Chapter 13 cases and if it is “triggered”, the debtor’s Chapter 13 plan must be for a mandatory five years or 60 months.

Under the current Bankruptcy Code many debts are excepted from discharge in a Chapter 7 case (see Resource Links, Williamson, Bankruptcy Questions and Answers, Chapter 7, Question number 3). One of the attractions of a Chapter 13 case under the current Bankruptcy Code is that many of these debts can be discharged in a Chapter 13 case (see Williamson, Bankruptcy Questions and Answers, Chapter 13,Question number 6). Many bankruptcy lawyers recommend a Chapter 13 case for this reason. The new Bankruptcy Code significantly reduces the number of debts that can be discharged in a Chapter 13 case. For example, under the current Bankruptcy Code taxes where no return has been filed, or has been filed within two years of the bankruptcy, cannot be discharged in a Chapter 7 case, but these taxes can be discharged in a Chapter 13 case, if the tax was due more than three years before the commencement of the bankruptcy case. This allows non filing tax debtors to get back into the tax system through Chapter 13. Under the new Bankruptcy Code these tax debts are no longer dischargeable in a Chapter 13 case. Under the current Bankruptcy Code debts resulting from the “willful and malicious” injury to another (tort claims) are not dischargeable in a Chapter 7 case, but are dischargeable in a Chapter 13 case. Under the new Bankruptcy Code these debts will no longer be dischargeable in a Chapter 13 case if the act results in personal injury or wrongful death to another, as opposed to just property damage. Credit card debts incurred by fraud, or debts incurred through the use of a materially false written financial statement supplied by the debtor, are not dischargeable in a Chapter 7 case, but are dischargeable in a Chapter 13 case under the current Bankruptcy Code. Under the new Bankruptcy Code these debts will no longer be subject to discharge in a Chapter 13 case. These changes in the law will not impact every consumer debtor in Fairfax County or Northern Virginia, but the debtors who are affected will suffer a significant impact.

There are additional changes in the law introduced in the new Bankruptcy Code that will restrict access to bankruptcy relief for many consumer debtors. Under the current Bankruptcy Code a Chapter 7 discharge is available every six years, under the new Bankruptcy Code such relief will only be available every eight years. Under the current Bankruptcy Code there is no restriction on how frequently a debtor can file for Chapter 13 relief. Under the new Bankruptcy Code if a debtor has received a discharge in a Chapter 7 or 11 case, the debtor cannot file for a Chapter 13 discharge for four years; and if a debtor has received a prior Chapter 13 discharge, the debtor cannot file another Chapter 13 case and receive a discharge for two years. Under the new Code before a debtor can file a bankruptcy petition the debtor must show that he or she has received credit counseling from an “approved nonprofit budget and credit counseling agency” within the last 180 days. A debtor will now have to provide a copy of his or her latest tax return to the bankruptcy trustee, and to any creditor who requests a copy, no later than 7 days prior to the debtor’s scheduled Meeting of Creditors. A debtor will also have to file copies of paychecks, or other evidence of income, received within 60 days prior to the filing of the bankruptcy petition, Again, it is difficult to predict how many consumer debtors in Fairfax County or Northern Virginia will be impacted by these changes introduced by the new Bankruptcy Code, but those impacted will suffer a significant impact. If you are concerned about how the new Code will effect you, you should consult a bankruptcy attorney to discuss your specific situation. I offer a free consultation and will advise you with respect to how the new legislation might impact your particular situation. Contact my office for a free consultation, 12501 Hayes Court #204, Fairfax, Virginia 22033 tel. 703-980-7102

 

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult a bankruptcy lawyer for individual advice regarding your own situation.