The Four Types of Bankruptcy

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 affects whether an individual can file for Chapter 7 or Chapter 13 bankruptcy. The new law:

• Includes a “means test” by which the IRS determines who can legitimately file for bankruptcy and who cannot. Those with lower income (under the median income for their state as cited in the table shown at the end of this bulletin) may file a Chapter 7 bankruptcy, which, if approved by a judge, erases debts entirely after certain assets are forfeited. Those with income above their state’s median income who can pay at least $6,000 over five years ($100 a month) would be forced to file Chapter 13, where a judge would then order a repayment plan.
• Requires that people filing for bankruptcy pay for credit counseling.
• Restricts a state’s homestead exemption 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 enable wealthy people to file for bankruptcy while keeping their mansions sheltered from creditors.]
• Places the burden of proof for bankruptcy on the debtor’s lawyer, requiring the attorney’s signature on the petition and verification that they have investigated the claim sufficiently and found it to be solid. While this may be a necessary step to ensure that claims are valid, it will also take more time and increase legal bills.
• Broadens the definition of “nondischargeable” debts (meaning debts that can’t be erased through Chapter 7 filing) to include certain types of student loans, debts to state and local governments, and monies owed to “governmental units.”