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The New Bankruptcy Law
President Bush signed the biggest rewrite of U.S. bankruptcy law in a quarter century on Wednesday, April 20, 2005 making it harder for debt-ridden Americans to wipe out their obligations.
“Bankruptcy should always be a last resort in our legal system,” Bush said. “If someone does not pay his or her debts the rest of society ends up paying them.”
Many debtors will have to work out repayment plans instead of having their obligations erased in bankruptcy court under the law, which will go into effect in six months. The 500-page legislation won final congressional approval last week after being pushed for eight years by banks and credit card companies.
The measure would require people with incomes above a certain level to pay some or all of their credit-card charges, medical bills and other obligations under a court-ordered bankruptcy plan.
Here is a summary:
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Means testing
The bill would establish a new test for measuring a debtor’s ability to repay. People 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. Those with income above the state’s median income who can pay at least $6,000 over five years — $100 a month — would be forced into Chapter 13, where a judge would order a repayment plan.
Under current law, a bankruptcy judge determines under which chapter of the bankruptcy code a person falls — whether they have to repay some or all of their debt.
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Credit counseling
The bill would require people filing for bankruptcy to pay for credit counseling
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Child support
The bill would give top priority to a spouse’s claims for child support among creditors’ claims on a debtor in bankruptcy.
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Military accommodations
The bill would allow for special accommodations for active-duty service members, low-income veterans and those with serious medical conditions in the new income test for bankruptcy applicants.
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Homestead exemption
The bill would restrict the homestead exemption in states to $125,000 if the person in bankruptcy bought his or her residence less than three years and four months before filing. Florida, Iowa, Kansas, South Dakota and Texas have unlimited homestead exemptions that allow people to file for bankruptcy and keep their homes in those states sheltered from creditors
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Supporters argue
Backers in Congress and the financial services industry argue that bankruptcy frequently is the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires — often celebrities — who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.
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Opponents argue
Opponents say the change would fall especially hard on low-income working people, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face crushing medical bills.
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Bankruptcy filings
New personal bankruptcy filings declined to 1,599,986 from 1,613,097 in the year ending last June 30, breaking an upward trend of recent years. Between 30,000 and 210,000 people — from 3.5 percent to 20 percent of those who dissolve their debts in bankruptcy each year in exchange for forfeiting some assets — would be disqualified from doing so under the legislation, according to the American Bankruptcy Institute.
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