“Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”

109th Congress—First Session

Responses to extra questions from the Washington Post online chat

• Arlington, Va.: Is Chapter 13 less damaging to one’s credit rating than Chapter 7?

  ABI Resident Scholar Jeffrey Morris: Creditors make their own decisions as to the impact of any bankruptcy filing on one’s credit rating. Under the Fair Credit Reporting Act, there is no distinction made as to the chapter under which a debtor has sought bankruptcy relief. The fact that the person filed a bankruptcy petition can stay on the credit report for 10 years.

• Las Vegas, Nev.: What would you say are the chances that it does not make it to law again in 2005?

  ABI Resident Scholar Jeffrey Morris: It appears that the House will consider and vote on the bill during the week of April 4. Thereafter, if the bill passes in its current form, it will be sent to the President for his signature.

• Bingham Farms, Mich.: What is the likelihood that the amendment reducing the penalties to debtor’s counsel due to inaccuracies in the schedulues [sic] will pass?

  ABI Resident Scholar Jeffrey Morris: The Senate allowed very few amendments to the bill, and the House Committee allowed no further amendments. Consequently, the provisions governing the responsibility of attorneys have been unchanged.

• Bingham Farms, Mich.: If your income is below the median income using the six-month average income requirement, will you be allowed to use “Actual expenses” in a Chapter 7, or will you be required to use the IRS standards, never the less?

  ABI Resident Scholar Jeffrey Morris: The means test includes the same living expense standards for all individual debtors regardless of the level of their income. However, if a debtor’s income is below the state median, no one can move to convert the case to chapter 13 on the basis of the failure to meet the means test.

• New York, N.Y.: If the reform bill is passed, when does it go into effect (is there a grace period so that people can continue to file under the existing Chapter 7 provisions)?

  Salem, Ore.: Assuming this awful bill sails through the house as anticipated, when will the new bankruptcy rules take effect? I’ve read conflicting accounts: six months from the day the bill is signed, but maybe even sooner depending upon the added momentum behind it.

  ABI Resident Scholar Jeffrey Morris: The general effective date of the bill is 180 days after its enactment. There are some provisions that go into effect immediately upon enactment, and other parts of the bill become effective at other times. Among the immediately effective provisions are those contained in §§308, 322 and 330 of the bill. These provisions relate to a debtor’s homestead exemption. You should see an attorney for advice on the effective date of any specific provision.

• Baltimore, Md.: I heard that there will now be some sort of income test for Chapter 7. what is that test?

  ABI Resident Scholar Jeffrey Morris: In general terms, the “means test” takes a debtor’s current monthly income and subtracts from that the debtor’s living expenses and payments on secured and priority claims. Other deductions include limited amounts for elementary and secondary school costs, the administrative expenses of a chapter 13 case in that district, and costs for the care of an elderly, chronically ill, or disabled family member. The remainder of the funds are considered available to pay to creditors, and if those funds exceed $100 or $166.67 (depending on the amount of the debtor’s nonpriority unsecured debts), then the debtor does not meet the means test and may not proceed under chapter 7. The case either will be dismissed, or the debtor can consent to proceeding under chapter 13.

• San Diego, Calif.: Will there be any special provisions for the disabled/legally blind within the new code?

  ABI Resident Scholar Jeffrey Morris: The means test includes the actual expenses for the care of a disabled family member among the deductions that are taken from the debtor’s current monthly income in determining whether the debtor meets the means test.

• San Diego, Calif.: Will the new law change or standardize the Homestead Exemption limits or is that provision going to remain state-specific?

  ABI Resident Scholar Jeffrey Morris: The bill does not standardize homestead exemptions. However, there is a provision that limits the amount of any otherwise available homestead exemption to $125,000 on any property that the debtor acquired in the 1215-day period prior to the commencement of the case. This limit does not apply if the property was acquired through the transfer of the debtor’s principal residence in the same state as long as the debtor owned that property prior to the 1215-day period.

• Fort Lee, N.J.: Under the currect version of the bill, if a person hasa a foreclosure complaint filed against their home, and the homeowner would like to file a Chapter 13 plan to catch up on the arrearage, does the homeowner still need to get credit counseling prior to the filing or is that considered “exigent circumstances” warranting a waving of the credit counseling requirement?

  Also, must the debtor get credit counseling 6 months before the filing or within six months of filing?

  ABI Resident Scholar Jeffrey Morris: The credit counseling must be obtained during the 6 months prior to the commencement of the case unless exigent circumstances prevent the debtor from obtaining those services. The bill does not define exigent circumstances. The court must find that the reasons offered for the inability to obtain the creditor counseling are satisfactory.

• Alexandria, Va.: One pro-bill argument is that bankruptcy is often abused by gamblers and frivolous spenders. What percentage of bankruptcies are these situations?

  Also, can you please explain the ‘rich people’ loophole in the new bill?

  Thank you.

  ABI Resident Scholar Jeffrey Morris: We are not aware of statistics identifying the number of gamblers and frivolous spenders who file for bankruptcy relief. As to the variety of homestead exemptions available to debtors continues to vary throughout the United States. While slightly restricted under the bill, some debtors will be able to retain their homes without regard to the value of the residence. Asset protection trusts that are available in several states may also provide some protection from creditors, but the bill includes a provision that permits the bankruptcy trustee to challenge transfers of property into these trusts if the transfer was made within ten years of the commencement of the bankruptcy as was made with an actual intent to hider, delay, or defraud creditors.

• Washington, D.C.: Hello, I’m trying to get my finances in order to see if I can avoid bankruptcy and I want to get my credit reports. A Google search only turns up for profit companies that offer to get me all 3 for a fee (with analysis), but I know I’m entitled to get them free if I go straight to the bureaus. Do you know their Web sites or phone numbers?

  ABI Resident Scholar Jeffrey Morris: You might try the website of the Federal Trade Commission. There is an explanation of that process and links from that site that should be of assistance to you.

• Virginia Beach, Va.: If someone claims me as a dependent on their income taxes, will that person be in any way liable if I declare bankruptcy?

  ABI Resident Scholar Jeffrey Morris: No. Simply claiming you as a dependent will not create any liability to your creditors.

• Clarksburg, W.Va.: When are the new amendments expected to take effect if passed into law on the currently projected schedule? That is,what do you expect to be the last date to file petitions under the current Code provisions?

  Bowie, Md.: If the legislation is passed, how long would it take to go into effect once the president signs it (e.g. six months or is it immediately)?

  Michigan: How much time do we have to file petitions under the old law?

  ABI Resident Scholar Jeffrey Morris: Some provisions of the bill become effective immediately upon enactment, while the bulk of the provisions become effective 180 days after enactment. The bill is before the House which expects to take it up during the week of April 4. Current indications are that the bill will pass in the House in a form identical to the bill passed in the Senate. If that occurs, the bill will be sent to the President who is expected to sign the bill. You will have to keep an eye on press accounts to determine the exact date of enactment.

• Bowie, Md.: If a person makes less than the median (state) income, I understand that person can still file Chapter 7. Will it be more difficult to file Ch. 7 (if a person qualifies) under the new legislation?

  ABI Resident Scholar Jeffrey Morris: The debtor would still be required to complete the forms relating to the means test, and the debtor will have to have had credit counseling before filing for bankruptcy relief. This may raise the costs for filing given that the credit counselors will be charging.