Bankruptcy law will change dramatically in October. Bankruptcy relief will not be available to some; will be more limited in scope; and will be more expensive. Debts that are dischargeable under the present law will survive a bankruptcy discharge under the new law.

Who should consider filing before the new law is effective?

• Unfiled tax returns: present law allows discharge of tax liability in Chapter 13 for tax years ending more than 3 years prior to the bankruptcy filing, even if the returns have not been filed. The new law eliminates this provision.
• Debts incurred by dishonesty: currently, a debtor can discharge, without challenge, debts that the creditor claims were incurred by fraud, breach of fiduciary duty, or intentional malicious acts. This provision has kept credit card companies from disputing the dischargeability of credit card debt. The Chapter 13 "super discharge" will disappear under the new law.
• Trust fund employment taxes: current Chapter 13 discharges even priority taxes such as the liability of a corporate officer for the withholding portion of employment tax liability if the taxing authority does not file a timely claim. Under the new law, tax liabilities for which no claim is filed will survive the bankruptcy.
• Car loans if the vehicle was purchased in the past two years and is now worth markedly less than the loan balance. The ability to strip down a car loan in Chapter 13, or redeem the car for its present value disappear under the new law on vehicles purchased within 2 1/2 years of the bankruptcy filing.
• Debts arising from a divorce: property division obligations or indemnity provisions will be non dischargeable in Chapter 7 but remain dischargeable in Chapter 13.
• Candidates for "Chapter 20": anyone who needs a "super discharge" now available in Chapter 13 but does not qualify by reason of the debt limits should consider acting immediately to file Chapter 7 so that the Chapter 7 discharge can be entered and a Chapter 13 case filed before October 17th. The new law attempts to limit the Chapter 20 strategy.
• Individuals filing Chapter 11: currently, a Chapter 11 plan proposed by an individual debtor does not have to take into account the debtor's earnings from personal service received after the case is filed; by definition, those wages are not "property of the estate." That changes under the 2005 amendments and debtors will have to give creditors some portion of the post petition earnings via the plan.
• Those with private lender student loans. These become non dischargeable in bankruptcy along with the government/non profit guaranteed loans in October.
• Prior bankrutcy case: currently there is no limitation on filing a Chapter 13 after a chapter 7 and the time span between Chapter 7 cases is six years. The interval between Chapter 7's moves to 8 years. A Chapter 13 discharge is available only if the debtor didn't get a discharge in Chapter 7 case filed within 4 years.

Income level

The means test imposed by the new law attempts to make all families with incomes over the median state income for a household of its size file Chapter 13. So anyone with an income above that level should consider filing before October. A real oddity in the law is that one's income is presumed to be the average of your income for the last 6 months. So, that income figure for purposes of the law may have no real relationship to the actual monthly income at filing.

Observations

Large credit card debts

Currently, credit card companies, especially the sub prime lenders and American Express, are prone to contesting the dischargeability of credit card debts in Chapter 7 when there are charges in the 3-6 months before the filing or where the balance is particularly large, perhaps in excess of $15,000 to $20,000. Often, if the nondischargeability case were actually tried to a judge, the debtor would prevail. The cost of such a trial however motivates debtors with valid defenses to settle or to opt for Chapter 13, where almost all debts are dischargeable.

Under the new law, debts non dischargeable because of fraud will survive a Chapter 13 discharge. Thus, individuals who suspect that they might face a creditor challenge to dischargeability would be well advised to file before the new law becomes effective. New, smaller Chapter 13 discharge.

Cost of bankruptcy

The new law is riddled with formulas, calculations, limitations, and economic fictions. Attorneys fees for cases filed after October inevitably will increase, probably substantially, to fund the legal work necessitated by the changes. The court's filing fee will increase about 25%.

Learn more

Bankruptcy basics Considering alternatives Site guide

American Bankruptcy Institute Q & A on new consumer provisions

Extended list of changes to the law by bankruptcy judge and Chapter 13 trustee

9/13/05