Memo to Debtors - If you plan to file for bankruptcy, do it now!

On April 20 President Bush signed into law the Bank-ruptcy Abuse Prevention and Consumer Protection Act. This legislation makes sweeping changes to the U.S. bankruptcy law, it extremel difficult to use bankruptcy as a tool to erase your debt. If you need to file for bankruptcy, consider filing before the legislation takes effect in October.

New Eligibility Criteria
When filing for bankruptcy, debtors have two options: Chapter 7, which provides a discharge of all outstanding debts, and Chapter 13, which provides for a reorganization of debts and systematic repayment. Under the new bankruptcy legislation, now to file Chapter 7 bankruptcy, the debtor must meet a “means test.” This test stipulates that any debtor with an income higher than the median income for families of the debtor’s size in his state would be exempt from filing Chapter 7, unless the debtor could prove extraordinary circumstances. The foundation of the means test is the debtor’s average income over the prior six months. From this figure, payments for back taxes, past-due child support and payments for mortgage and a car are subtracted. Child educational expenses for both private and public schools are also subtracted, but they are limited to $1,500 per child per year. Finally, a small living expense stipend is deducted. If, after deducting these amounts, the debtor could pay at least $6,000 to unsecured creditors over five years, the debtor is prohibited from discharging his debts through a Chapter 7 filing.

Calculating Disposable Income
Under current law, a debtor’s disposable income, which is used to determine how much of the prefiling debt must be repaid, is determined by the judge’s assessment of what living expenses are necessary and reasonable. Prepayment plans typically run three years but no longer than five years. Under the new legislation, disposable income will be calculated using IRS collection standards. Debtors whose gross income exceeds the state median will be required to remain in Chapter 13 for five years.

With the new legislation, debtors must obtain approved credit counseling before they can file a case and all unfiled tax returns must be filed within weeks of the commencement of the case. Most important, the legislation provides that lawyers for the debtor face personal liability for monetary sanctions if a Chapter 7 case is filed and the debtor is found to be ineligible for Chapter 7 or, if’ later, facts in the bankruptcy petition are disproved. These new requirements and the associated financial threat to bankruptcy attorneys will certainly drive up costs and may make some attorneys uncomfortable filing Chapter 7 petitions.

Extended Filing Intervals
Under current law, a debtor may file for Chapter 13 bankruptcy immediately after a Chapter 7 filing in order to organize the repayment of debt that survived the Chapter 7 filing. In addition, Chapter 7 bankruptcy may be filed again in the seventh year following a previous Chapter 7 filing. With the new legislation, a Chapter 13 filing may occur only within four years of a Chapter 7 discharge, and the interval between Chapter 7 filings has been extended from seven years to nine years.

Automatic Stay
Perhaps the biggest and most potent change in the bankruptcy law is the near elimination of the automatic stay. Under current law, when bankruptcy is filed, the “automatic stay” provision uniformly stops collection actions against the debtor or his property and requires creditors who want to continue enforcement to get permission from the bankruptcy court. Under the new legislation, the automatic stay is conditioned on a variety of circumstances, eliminating the automatic stoppage in collection actions. Filing bankruptcy will no longer stay acts to collect back support, or stop the revocation of driver’s licenses or professional licenses. In addition, creditors omitted from the official list of creditors are free to continue collection actions even if they have actual notice of the bankruptcy. If a prior bankruptcy case is dismissed, the duration or even the existence of a stay is limited in subsequent cases, and landlords are freed to complete evictions, even when the tenant-debtors are paying rent.

According to the American Bank- ruptcy Institute, While it is still possible to cancel debts through bankruptcy, the ability to do so has been drastically reduced through the new, recently passed bankruptcy legislation.

David Hinson is founder of Wealth Management Network in New York City, 646-375-2388, www.wmnllc.com. E-mail: dhinson@wmnllc.com.

By David Hinson