Individuals have long had the option of filing one of two forms of bankruptcy in America. Chapter 7 deals with a complete liquidation of assets to pay creditors and virtually wipes the slate clean, giving the filer a fresh start (except for also wiping out credit for several years.) Chapter 13 is a reorganization plan. All the players get involved and work out a repayment plan everyone can live with.

Both Chapter 7 and Chapter 13 can play havoc with your credit score and with your life. Catastrophic medical bills, divorce and job loss can be legitimate reasons to rely on these safety nets, but out-of-control spending and yuppie “gimme…gimme…gimme” attitudes have raised the bar and brought about new bankruptcy legislation. Don’t get me started on the role credit card solicitations play in this chaotic scenario!

If you are one of the unfortunate souls heading into the New Year facing the prospect of bankruptcy, listen up! Start saving your paperwork (See the side bar...you're guilty until proven innocent now) You’ll be required to present your most recent Federal Tax Return along with proof of income statements. These should be things you’re saving anyway, but the court will need access to these materials in order to verify your situation. If you owe taxes, you’ll need to pay them before you can proceed. Be prepared for a 90 minute counseling session (Another source for fees and getting you in the system) Even if your situation is cut and dried, you must undergo a government-approved credit counseling session prior to filing, to help determine if bankruptcy is a viable solution for your problem. Whether or not you agree with the determination, you will need proof that you completed the counseling and submit any repayment plan the agency recommends before you can file. After filing, but before debt can be discharged, you’ll have to attend an additional personal financial management educational program. Unless you can show that you have completed this course, your debts will not be taken care of. Beware pending lawsuits and other previously protected items (You no longer have a legal strategy for stalling legal actions) Previously, filing for bankruptcy could delay or even stop driver’s license suspensions, eviction or divorce proceedings, and legal actions for child support. That’s no longer the case. Involvement in any of these can continue during the bankruptcy filing, increasing debt, stress and emotional hardship. Taxes, child support and alimony remain at the top of the priority list for creditors who can expect to get paid from the bankruptcy debtor’s coffers. Know that creditors can contest a ruling (This has always been the case with a seven but now you have to prove you're not doing something wrong rather than creditors proving you are). Creditors who were awarded nothing from a bankrupt debtor could only contest a ruling in a Chapter 7 case prior to the new bill. That right has been extended to creditors in Chapter 13 cases as well. That leaves the possibility of lawsuits dragging on far beyond the settlement period. Understand the “Means” test (The government and bank decide what you can afford, not reality) Along with the new bill is a new mode of calculating disposable income to help determine a petitioner’s eligibility for Chapter 7. Fail the means test, and the debtor must file Chapter 13 (reorganization). This test takes current monthly income, compares it to a government median income table, then subtracts amounts allowed by IRS tables for transportation, food, clothing, etc., to find out how much disposable income the debtor has. This final figure may have no relation to your actual income and expenses.

The Most Ominous Change in Bankruptcy Law? -by LD Lewis All Filers Must Prove a Negative What it means to you: Upon filing for bankruptcy, you are assumed guilty of attempting to defraud creditors.  The new laws require you prove you are not defrauding anyone. If challenged by a creditor, you must prove you are innocent of a crime. You must prove a negative. This requirement adds  tens of thousands of dollars to the cost of obtaining a bankruptcy placing the option out of reach for most Americans. Most people would not be filing for bankruptcy IF they had an extra ten or twenty thousand dollars lying around.  This new law creates a catch-22 allowing for the legal transfer of assets from private citizens to corporations and the government should your family find itself buried under medical bills, in a natural disaster or without a job.  Not only is the bankruptcy act unconstitutional, (violates the fourth and fifth amendments) it places undue pressure on the average American, returning us virtually to the days of debtor's prisons and public humiliation. How did this happen?  Congress and the senate abdicated their duty and oath of office to protect and defend the constitution of the United States in favor of protecting credit agencies, corporations and banks. They did this by approving the   Bankruptcy Act of 2005. (Not the first time our 'elected' officials in BOTH parties have failed to represent us.  The Patriot Act, CAPPS II and many other 'laws' also go against their oath and job description, transferring our rights to corporations and government. Not the first time, but we could make this the last).   Bottom line: It is impossible to prove a negative.  You cannot prove you are not doing something.  You cannot prove you are not cheating creditors.  You cannot prove you are not hiding WMD's. You cannot prove you are not manufacturing nuclear weapons. You cannot prove a negative meaning you are guilty even if innocent. The new bankruptcy laws require impossible tasks facilitating the transfer of your property to corporations or government.  That is the real effect of these new laws and the reason the cost of obtaining a bankruptcy now becomes prohibitive. --Sources: The Law firm of Shadwyck & Dayton LLP, Temecula, CA. , US Bill of Rights

 If your total monthly disposable income based on the means test formula is over $100, you’re probably stuck with Chapter 13. It’s the number the court will use to decide what you will pay back and what will be discharged.
 

Links to helpful sites dealing with government tables for income and expenses can be found here: http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm

Get ready to live
on a pre-determined budget
(Just like those student loan living allowances...based on someone elses' reality)

Whether you file Chapter 7, Chapter 13, or help yourself through consumer counseling, prepare for a revised lifestyle. Whatever got you into trouble will keep you in trouble if you don’t face up to the problem.

If your debts were discharged under Chapter 7, you’ll find much of your property has been sold to repay creditors, and your credit report will interfere with attempts to replace it.

Repayment plans under Chapter 13 will see large chunks of your income going to pay off debt, leaving very little to enjoy anything but the most basic necessities.

Should you be able to convince creditors to accept less and create a plan to repay debt without bankruptcy, it will mean a serious commitment to frugality.

Summary

State laws are different. Bankruptcy isn’t something you should undertake alone. Seek legal counsel before you embark upon such an important decision.

Resources to help you through the new bankruptcy rules:

U. S. Trustee Program (oversees administration of bankruptcy cases): http://www.usdoj.gov/ust/

Nolo Press (put “Bankruptcy” in this search box): http://www.nolo.com

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