Bankruptcy used to be a debtor’s last resort. However, Americans are filing for bankruptcy in record numbers: 1.6 million did so in 2004, up from about 900,000 in 1995. This rise has caused Congress to enact modifications to bankruptcy laws making it more difficult to file for certain types of bankruptcy and which change the types of assets that are exempt from creditors in bankruptcy proceedings.
According to Consumers Union, 85% of elderly debtors cite medical or job problems as the reason for bankruptcy. A study by Professor Elizabeth Warren of Harvard reported that half of all bankruptcies are triggered by sudden uninsured medical expenses.
There have been several changes in the federal laws on bankruptcy. In some cases, state laws can modify the federal statutes so check local laws. Under the new federal bankruptcy law, if the debtor has moved within two years of the bankruptcy filing, the laws of the state where the debtor lived for the largest portion of the six months preceding that two year cutoff will apply.
Some Major Changes to the Bankruptcy Laws:
IRS rules will determine “reasonable” expenses in debt repayment plans, making fewer people eligible for Chapter 7.
Chapter 13 bankruptcy plans will become more difficult to repay for people living in places with a higher cost of living. No more “Automatic Stay”—People filing bankruptcy will no longer be shielded from many legal proceedings against them, such as loss of professional licenses and certain lawsuits.
Debtors who wish to file bankruptcy will now have to complete credit counseling and courses on financial management before they will be allowed to file for Chapter 7 or 13 bankruptcy.
The list of debts that cannot be wiped out through bankruptcy is expanded to include recent luxury purchases, child support and debts brought on through fraud, as well as others.
New amendments to the Chapter 13 law will require debtors, who wish to keep their car, to pay the full loan amount on car loans, rather than the current value, as previously allowed.
Qualified plans such as IRA’s can be exempt in bankruptcy, as is some life insurance.
Equity in a personal residence can be exempt. However, federal law caps this equity at $125,000 for homes that were purchased within 40 months of the bankruptcy filing, regardless of any higher state exemption.