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New Bankruptcy Law Changes

Southern California Bankruptcy Laws

Many Southern California residents erroneously believe that filing for bankruptcy is no longer a viable option because of the new "bankruptcy reform" laws.  These laws began on October 17, 2005.

Such belief is not true!

The truth be told, many people are now as able (or sometimes more easily able) to qualify for Chapter 7 bankruptcy and Chapter 13 bankruptcy under the new bankruptcy law as under the old set of laws!  But there is a lot more “red tape” which results in more time, energy, and expense to file bankruptcy and obtain a discharge of debts.

Note: Some people are, however, negatively affected by the new laws.

Key changes to the new bankruptcy laws include:

Mandatory Credit Counseling: 180 to 0 days BEFORE filing any bankruptcy case in Southern California, you must complete a credit counseling course online or over the phone. I generally refer my clients to a particular credit counselor who is approved by the federal bankruptcy court.  Upon completion of the online or telephone counseling session, the credit counselor issues a "Certificate of Completion."  This certificate is filed with the bankruptcy court along with your other bankruptcy petition documents.

Mandatory Financial Management Course (Debtor Education): Under the new law, Debt Management is a required course.  By law, you must complete it during the course of the bankruptcy but AFTER the date of filing the bankruptcy petition.  I refer my clients to a court approved course.  The course is conducted by a well-known, popular, and dynamic Christian financial management expert.  You can watch the course online or order a DVD.  Clients have expressed overwhelmingly positive feedback about the course. A bankruptcy debtor is required to file with the court a "Certification of Completion of Financial Management Course" within 60 days after the Meeting of Creditors date.   

Means Test: The Means Test is a method to determine who may and may not be eligible to file Chapter 7 bankruptcy.  The test is typically applied people whose debts are primarily consumer debts.   It is not applied to people whose debts are primarily business debts as well as several other exceptions.  

A Means Test formula is used that evaluates whether or not a debtor has the financial ability to pay back a substantial part of his or her debts through a Chapter 13 bankruptcy repayment plan.  The formula uses your income based on your average gross income during the 6 months immediately before the month that you file bankruptcy as well as a multitude of other factors.

Tax Returns: In a Southern California Chapter 7 bankruptcy filing, a debtor must typically provide the previous year’s tax return to the bankruptcy trustee. In a Chapter 13 bankruptcy, the debtor must submit the last 2 to 4 years’ tax returns, depending upon the facts of the case.

Attorney Duties: The new laws now essentially require your attorneys to presume that you are not being honest with your attorney.  That’s why we now must require that you produce so many documents to us!  Fortunately, nearly all of my clients are honest people.

Waiting Periods between Bankruptcies: Occasionally, a person might need to file bankruptcy more than one time.  The following time mandatory waiting periods now apply between bankruptcy filings (For making calculations, the start and ending dates are the date of filing of each case and not date the of discharge):

Prior Bankruptcy to Current Bankruptcy (Use date of filing the case, not the discharge date:

Ch. 7 to Ch. 7 = 8 years: Prior Chapter 7 Bankruptcy to Current Chapter 7 Bankruptcy, you must wait 8 years.

Ch. 13 to Ch. 13 = 2 years: Prior Chapter Bankruptcy to Current Chapter 7 Bankruptcy, you must wait 2 years.

Ch. 7 to Ch. 13 = 4 years: Prior Chapter 7 Bankruptcy to Current Chapter 13 Bankruptcy, you must wait 4 years.

Ch. 13 to Ch. 7 = 4 or 7 years: Prior Chapter Bankruptcy to Current Chapter 7 Bankruptcy, you must wait 4 or 7 years, depending on the circumstances.

There are exceptions to certain of the the above rules, however.

Non-dischargeable Debts: Certain debts are no longer forgiven under the new law but were dischargeable under the old bankruptcy laws. But, practically speaking, few cases have these issues arise.

Reaffirmation Agreements: By reaffirming a debt, the debtor and a secured lender agree in writing to continue under the terms of the existing loan or, in some cases, modify one or more terms of the original loan.  The downside to signing such agreements is that if you later default on the loan, the creditor can sue you for any deficiency. 

Under the old bankruptcy law, instead of reaffirming the debt, the bankruptcy debtor could elect keep the secured property and repay by a method called “retain and pay” or “ride through.”  Utilizing this method, the debtor simply remained current on the loan obligation and continued to make monthly payments but did not sign any reaffirmation agreement.  The advantage of the retain and pay option was this: If a debtor later defaulted on a loan, the creditor could only repossess the property; but the creditor could not sue the debtor for money damages to pay any deficiency.  However, "retain and pay" is no longer a recognized option for personal property (for example, cars) under the new bankruptcy code.  

But some bankruptcy debtors still attempt to “retain and pay” anyway.  Further, many (but not all) creditors will voluntarily agree to allow this retain and pay option even though it is not officially permitted.  I advise my client of the pros and cons of the various options concerning secured debts and reaffirmation agreements to help them make a sound decision.

Exemptions: Exemptions are laws that protect a debtor’s property from being sold during the bankruptcy in order to pay creditors.  Under the new bankruptcy laws, one must use the exemptions used by the state where the debtor resided during the entire past 730 days (2 years) before filing.  If the debtor resided in more than one state during the past 730 days, then one must use the bankruptcy exemptions allowed to be used by the state where the debtor resided the greatest amount of time from 731 to 911 days (a period of 180 days) before the time of filing the bankruptcy petition. The purpose of this law is to discourage “forum shopping” so as to find the state with the best exemption protection laws. For most people, this new law has no effect on their bankruptcy case.  It is unlikely that this law will apply to you.

For a free and confidential consultation, contact Christian bankruptcy lawyer, Matthew B. Tozer.  His bankruptcy services are available to residents of OrangeRiverside and San Bernardino counties, as well as Los Angeles County.

Under the new bankruptcy laws, attorney Mr. Tozer is a debt relief agency because he helps people file for bankruptcy relief under the Bankruptcy Code.


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