According to the American Bankruptcy Institute, personal bankruptcy filings have reached historic highs. For example, filings first cleared the 1 million mark in 1996. They then surpassed the 1.5 million mark in 2002. And they continue to average more than 1.6 million annually (although in 2004 they have eased off their highs).
The Bankruptcy Abuse Prevention and Consumer Act was signed into law enacting measures that will make it more difficult for consumers to get out of debt by filing personal bankruptcy. The first major overhaul in 27 years will become effective in 180 days.
With the biggest rewrite of the bankruptcy code in
almost three decades, filing for relief may become a path less often traveled. The most significant part of the new revisions will make it more difficult for individuals to file for relief under Chapter 7 under which approximately 70% of all personal bankruptcies petitioners seek protection.
S. 256, the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," which makes several changes to the Bankruptcy Code, including establishing a means test for chapter 7 bankruptcy, raising the priority for payments of domestic support obligations, placing limits on the homestead exemption, and
requiring credit counseling prior to filing for bankruptcy; and enhances credit card company disclosure requirements.
The most controversial part of the overhaul is the needs test where those whose income exceeds their state's median income, and can pay at least $100.00 per month over a 5 year
period ($6,000.00), would be forced in to a Chapter 13 repayment plan.
Prior to filing, the law requires consumers to enroll in a credit counseling
/ debt consolidation repayment plan for 6 months in an effort to get their finances in order.
The law is expected to affect between 30,000 and 210,000 people who file for chapter 7 bankruptcy protection and force them into a chapter 13 repayment plan.
Those people have six months until the law takes effect to escape the tougher guidelines. Bankruptcy lawyers have said they anticipate a rush to the courthouse.
Under the current system, a federal bankruptcy judge determines whether individuals must repay some or all of their debt.
Under the new law, those with insufficient assets or income could still file a Chapter 7 bankruptcy, which, if approved by a judge, erases debts entirely after certain assets are forfeited.
Additionally, this law places domestic support obligations such as child support and alimony amongst the first priority claim category of non-dischargeable debts on a debtor filing for bankruptcy. However, claims to back child support and alimony would be on equal footing with the claims of credit-card companies.
Additionally, states that have unlimited homestead exemptions (Florida, Iowa, Kansas, South Dakota and Texas) and allow anyone to file and shelter their primary residence regardless of value, will now have limits of up to $125,000.00 if the petitioner bought the residence less than three years and four months before filing. Homes purchased before that cut-off would still qualify for the full exemption allowed in that state.
New personal bankruptcy filings went from 1,613,097 in the year ending June 30, 2003, to 1,599,986 in the year ending last June 30, counter to that upward trend of recent years.