Understanding The New Bankruptcy Laws
A person or a business entity can file for bankruptcy in order to settle debts from creditors through liquidation of assets or reorganization of debts. The bankruptcy laws of the United States in particular allow debtors to file for Chapter 7 bankruptcy (liquidation bankruptcy) or Chapter 13 bankruptcy (reorganization bankruptcy). A considerable number of people file for bankruptcy every year. In relation to this, bankruptcy fraud or abuse also takes place in alarming frequency. To address this problem, new bankruptcy laws have been adapted.
The new bankruptcy law, formally titled as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, has been implemented to create reforms in bankruptcy laws. Several factors have been considered during the creation of this law. These factors include the increase in bankruptcy filings, losses incurred from bankruptcy filings, potential bankruptcy abuse and the ability of debtors to repay debts.
One of the important changes that are stipulated in the new bankruptcy laws are counseling requirements before a person may be able to file for bankruptcy under Chapter 7 or Chapter 13. Credit counseling should be done with an agency that is accredited by the Office of the United States Trustees. The purpose of this requirement is to determine which type of bankruptcy a person may file for. Personal financial management sessions are also required even after a bankruptcy case has ended. This is a requirement for a debtor to be able to get his bankruptcy discharge records which are needed to eliminate outstanding debts with creditors.
Another major change in the new bankruptcy laws is the means test which is a feature of the law that prohibits people with high incomes to immediately resort to Chapter 7 instead of filing for Chapter 13 bankruptcy. As basis, the current monthly income of the debtor for the six months immediately preceding the bankruptcy filing is compared to the median income for a certain family size in the state where the debtor is residing. After comparison, a debtor with an income that is less than or equal to the median income of the state will be allowed to file for Chapter 7 bankruptcy. On the other hand, those who have higher incomes will only be allowed to file for Chapter 13. The new bankruptcy laws stipulated the means test to determine if a person has enough disposable income that can be used to pay off debts through reorganization liquidation. Furthermore, the new bankruptcy laws also stated stricter requirements for bankruptcy lawyers making it more difficult and costly to hire one. Also, since the requirements and policies in the bankruptcy process have become more tedious, lawyers would have to spend more time with clients leading them to charge higher professional fees. Lastly, the new bankruptcy laws require that all assets or properties of a debtor should be valued through its replacement value. This is how much a property costs if it is replaced from a retail store. Because this increases the value of certain assets, it is very likely that debtors would lose their properties for liquidation by the trustee.
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