In 2005 there were new bankruptcy rules that were introduced for all US citizens. These new rules concentrated on Chapters 7 and 13 bankruptcies and also looked at the need for credit counseling for anyone who is filing for bankruptcy. So what do these new rules actually mean in practice?
Restrictions for Chapter 7
Previous to the new bankruptcy rules, anyone who wanted to file for bankruptcy could choose between Chapter 7 and Chapter 13 bankruptcy. Anyone filing for Chapter 7 bankruptcy was able to go into liquidation and have the majority of their debts written off, whereas anyone filing under Chapter 13 had to set up repayment plans to pay off their debts. However, this was not deemed as fair or equitable for anyone who earned a high income as they were seen to be getting away with not repaying their debts.
In order to test whether or not a person is eligible to file for Chapter 7 bankruptcy the new rules stated that they would have to undergo a means test. This is a form of financial testing which works out whether or not a person has enough disposable income to set up a repayment plan rather than going into liquidation. If a person does not have enough disposable income they will be allowed to file under Chapter 7, however if they do have enough disposable income they will have to file under chapter 13.
The new bankruptcy rules also state that anyone who wants to file for Chapter 7 or 13 bankruptcy has to undergo credit counseling with agencies that have been approved by the United States Trustee’s Office. This is required in order to ascertain whether bankruptcy really is the best option or whether an informal repayment arrangement would be more suitable. Even people who are unlikely to be advised to take out repayments plans have to attend counseling prior to filing for bankruptcy. As the case draws to a close another counseling session is also required and this focuses on the future. Here attendees learn about how to manage their finances better so that they can avoid getting into any difficulties in the future.