Before the new law, consumers could pretty much choose which type of bankruptcy they want to file - chapter 7 or chapter 13 - within reasonable limits. The new law puts into use a "means test." This test, administered by the bankruptcy attorney, will determine which bankruptcy the consumer is allowed to file.
The means test looks at your income and expenses in a particular way. With income, your attorney will average your income from the last six months. He takes this average and measures it against your state's median income. Your average income for the six months is used regardless of whether you've lost your job recently or had a pay cut. Therefore, for some people, the average income might be higher than their actual income, which could hurt them in light of the new bankruptcy laws.
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The second part of the means test, expenses, examines your outgoing cash flow, minus your rent/mortgage payments, child support, past due taxes, car payments, and $1500 in private school tuition. The attorney then determines if you can pay out at least $100 per month to unsecured creditors.
What does means test really mean? If your average income is above the state median, you must file chapter 13 bankruptcy, unless your circumstances are extenuating. If your income is below the median but it is determined that you can pay the $100 per month to unsecured creditors, you also must file for chapter 13 bankruptcy. Ultimately, however, the judge decides whether your circumstances are extraordinary enough to warrant a chapter 7 filing. The next few years of bankruptcy filings under the new laws will shed more light on what counts as an extraordinary circumstance.
The new laws include a residency provision. Some states, such as Florida, have more consumer-friendly bankruptcy jurisdictions than others. People would move to the favorable state and immediately file bankruptcy. Under the new laws, you must be a resident of the state in which you're filing for two years.
Your personal possessions carry a higher value under the new laws. Attorneys used to advise people to list all their possessions and value them according to what they could get for them at a garage sale. Today, possessions must be valued at full replacement value, taking into account its age and condition. Attorneys must then certify that the values are correct. What does this mean to the consumer? Ultimately, when your possessions are worth more, you could end up paying creditors a higher amount.
Bankruptcy filing-related fees are expected to double under the new laws. Costs involved in filing bankruptcy ranged in the $700-1500 area. Now, fees can be as high as $3000. This is because the new laws put an extra burden on the attorneys. They must certify the filer's income, expenses, and assets, in addition to other burdens that the new laws place on them.
While there are many other considerations under the new bankruptcy laws, these are some of the major provisions. What are some alternatives to filing bankruptcy?
One option is to do nothing, especially if you have very little in terms of property and assets. The government can't take away any of your basic, necessary assets, such as clothing, food, social security, and ordinary furnishings. You also can't go to jail for not paying your debts. If someone tries to sue you, they can't collect because you have no assets to collect upon.
Another alternative is to do your own negotiating with your creditors. For many, accepting a settlement of a lesser payment or payoff is more desirable than getting nothing in bankruptcy.
Regardless of whether you file bankruptcy or go with an alternative, keep a close eye on your credit scores. Make no mistake, your score will take a tremendous hit after filing. However, it's not unusual to raise your score dramatically within a year or two with a solid score-boosting plan in place. Two years after your bankruptcy is discharged, you'd be surprised at how many credit options you'll have available if your score is boosted.
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