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THE LAW OFFICES OF JOEL SHAFFERMAN (212) 509-1802
INSOLVENCY AND CREDITOR’S RIGHTS NEWSLETTER SPECIAL EDITION AUGUST, 2005
MAJOR CHANGES TO UNITED STATES BANKRUPTCY LAWS
This is a special edition of the Law Offices of Joel Shafferman Insolvency and Creditors’ Rights Newsletter which will highlight some of the major changes to the Bankruptcy laws of the United States.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "2005 Act'") was signed by President Bush on April 20, 2005. The 2005 Act makes substantial changes to the Bankruptcy Code and other bankruptcy-related statutes, the most pervasive changes to the United States Bankruptcy Laws since 1978. The changes involve all aspects of the Bankruptcy law from the rights and obligations of individual debtors to business entities operating on foreign shores. The changes described in this newsletter and most of the other changes to the law become effective on October 17, 2005. While it is impossible to describe these massive changes in this forum, this special edition of the Insolvency and Creditors’ Rights Newsletter attempts to highlight certain of the major changes. Please contact us at 212-509-1802 if you would like more information or have specific questions or concerns about the changes to the United States bankruptcy laws.
INDIVIDUAL BANKRUPTCY CASES
Means Testing
The current Bankruptcy Law allows any individual debtor to obtain a a complete discharge in Chapter 7. The caveat to this is that if an individual has equity in his/her property, including a home and motor vehicle and stock, circumstances to justify additional expenses or adjustment of current the trustee will sell these assets to pay creditors. The 2005 Act introduces an entirely new hurdle for an individual to scale in order to obtain a discharge of debt without having to repay creditors. This hurdle is known as “means testing”, which provides that an individual with primarily consumer debts will be permitted to file for chapter 7 relief based upon an analysis of whether the debtor can repay a scheduled amount or percentage to unsecured creditors.
Under the 2005 Act, an individual’s Chapter 7 case will be dismissed, with the discharge of debts not being accorder to individual, or the individual will be required to repay his/her creditors under a court approved plan for “abuse” if the debtor's current monthly income, reduced by certain specified expenses, when multiplied by 60 is not less than 25 percent of the debtor's non priority unsecured claims or $6,000 (whichever is greater) or $10,000.
The 2005 Act’s definition of current monthly income excludes any social security benefits, payments to victims of war crimes or victims of crimes against humanity, and payments to victims of international or domestic terrorism. The exclusion of these benefits, most commonly social security benefits, would automatically permit a debtor whose sole income is from those benefits to pass the means test.
An individual may rebut the presumption of abuse by demonstrating special monthly income for which there is no reasonable alternative. Individuals must provide information in their schedules showing whether the means test presumption arises. If an individual debtor in a chapter 7 case fails to file his/her list of creditors, schedules and. statements within 45 days of the commencement of the Chapter 7 case, the case will be automatically dismissed unless the 45-day period is extended by the court or if it is found that the debtor filed the Chapter 7 petition in good faith.
Mandatory Credit Counseling
The 2005 Act requires all individual debtors to obtain, within 180 days of filing bankruptcy, an individual or group briefing from an approved nonprofit budget and credit counseling agency, and the briefing must, at a minimum, have "outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.” The briefing or course may be provided over the telephone or the Internet. Unless an exception applies, as a condition to filing bankruptcy, the debtor must file with the court a certificate from the agency describing the services offered, and, if a debt repayment plan was created, the debtor must file that plan.
Domestic Relations Provisions
The 2005 Act expands the exception to discharge contained in the current Bankruptcy Code for debts in the nature of alimony maintenance or support. A new term, "domestic support obligation", is included in the 2005 Act. The 2005 Act’s definition of "domestic support obligation" encompasses alimony, maintenance or support, but also includes debts that accrue after the case is commenced and includes support debts that from their inception are owed to a governmental unit.
Under the 2005 Act, all domestic support obligations are nondischargeable. All marital property settlement obligations not in the nature of support are nondischargeable. In other words, a Chapter 7 discharge will not excuse a debtor from such obligations.
Under the 2005 Act, domestic support obligations are first in priority among unsecured debts.
Under the 2005 Act, Congress created new exceptions to the automatic stay for commencement or continuation of state court actions involving child custody, domestic violence, and certain issues arising in domestic relations state actions.
Protection of Retirement Savings
The 2005 Act permit individual debtors to exempt all funds in any account exempt from taxation under sections 401, 403, 408, 408A, 414, 457, and 501(a) of the Internal Revenue Code. The only exception is an IRA account other than a SEP IRA under section 408(k) or a simplified employee pension under section 408(p), not created by a rollover from a non-IRA account, to the extent it exceeds $ 1,000,000, unless the court increases that amount in the interests of justice.
Protection of Education Savings
The 2005 Act excludes from the monies available to creditors funds contributed more than 365 days before the c m
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