Bankruptcy Law ChangeNew Changes: Will You Be Able to Keep Your Home?There may be a bankruptcy law change which will help homeowners who are having a tough time making those house payments. Homeowners may have a better chance of saving their homes using the bankruptcy code on a process called cram-down. If cram-down becomes an option for bankruptcy judges, they can alter the terms of mortgages (often reducing the amount of principal due) to make it affordable for someone to stay in their home. Another bankruptcy law change could include reducing a loan's interest rate or extending its length. Supporters say cram-down would free homeowners from debt they can't afford while encouraging lenders to make deals with the homeowners before reaching the courthouse. Those who are against it argue that cramdown would spook the mortgage market, driving up borrowing costs and making loans harder to get. Right now lawmakers are calling on Democrats to support what is cram-down. The proposal, which sailed through the House last April, only to stall in the Senate on a 45-51 vote, authorizes bankruptcy courts to adjust mortgages. If the bill were to pass, a judge could reduce principal or interest rates on home loans and stretch out mortgage payments—something bankruptcy courts can do already with virtually every other kind of debt. The housing market is also being supported by extending the homebuyer's tax credit. On November 5, 2009 both the House and the Senate have passed an amendment that expands and extends the homebuyers tax credit. The credit ends April 30th, 2010. At this time there is no extension planned.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
Now that the bankruptcy law change has taken effect-The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, since being passed by Congress and signed into law by President Bush, filing bankruptcy is more challenging. The majority of changes instituted by this new law took effect on October 17, 2005.
I want to get some of the more common questions answered here about the bankruptcy law changes and how it will affect you. You can get more detailed information from the US Courts Bankruptcy Basics.
In a nutshell, if your income is high you won’t be allowed to use Chapter 7, but will instead have to repay at least some debt under Chapter 13. You will have to get credit counseling before you can file your case. You will also have to get additional counseling for budgeting and debt management before your debt can be discharged. Who Can File for Chapter 7 has changedPreviously, before the bankruptcy law change, you could choose which type of bankruptcy, Chapter 7 or Chapter 13, would be best for you. Chapter 7 is liquidating your assets and Chapter 13 is repaying your debt under a payment plan.If you wish to file under Chapter 7, you must meet certain eligibility requirements under a "means test." Under the new rules, the first step in figuring out whether you can file for Chapter 7 is to measure your "current monthly income" against the median income for a household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7. If it is more than the median, however, you must pass "the means test" -- another requirement of the new law -- in order to file for Chapter 7. The Means TestThe purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to make payments on a Chapter 13 plan or if you are allowed to file for a Chapter 7 bankruptcy.
To find out whether you pass the means test, you subtract certain allowed expenses and debt payments from your current monthly income. If the income that's left over after these calculations is below a certain amount, you can file for Chapter 7. The courts provide a worksheet which compares your monthly income to the median income of your area. The median income is determined by where you live (your geographic area) and the size of your family. If your monthly income is at or below the median, then you are able to file for Chapter 7. If your income exceeds the state median, then you have to answer to another part of the test. In the next step, allowable expenses are deducted from your monthly income based on IRS standards. The amount that’s left over is your disposable income. Your disposable income is multiplied by 60. It's multiplied by 60 because the courts want to know how much disposable income you will have over the next five years. If that total is less than $6000, you can file for Chapter 7.
Income TaxesIf you are wishing to file bankruptcy since the new bankruptcy law changes went into effect on October 17, 2005, under Chapter 7 or Chapter 13 you must now show proof of your income by providing federal tax returns from the last tax year.If you have not paid taxes for the previous tax year, you must do so before the bankruptcy can proceed. Credit Counseling
As of October 17, 2005, when the bankruptcy laws changed, you must undergo credit counseling in a government-approved program.
After the conclusion of bankruptcy proceedings, but before any debt can be discharged, you must participate in a government-approved financial management education program. You can get more information on pre-filing credit counseling and debtor education (and lists of approved counseling and debtor education agencies) from the USDOJ (United States Department of Justice) (a component of the United States Department of Justice responsible for overseeing the administration of bankruptcy cases). It's not as scary or difficult as it may sound. Each state has several companies that offer counseling. They differ in how they deliver the information and how they work. You may do this either online, on the telephone or in person. For more detailed information, please check out my book, (My FREE gift to you),
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