Bankruptcy Reform Highlights (2nd Installment)
I’ll try to make this blog posting shorter than the last.
Chapter 13 Changes:
1. Curbing Lien Stripping - One of the advantages of filing Chapter 13 is that Chapter 13 allows debtors to “cramdown” liens of some secured creditors. In many cases, debtors owe a lot more on secured items than the items are worth. Chapter 13 laws allow a debtor to obtain title to collateral by paying only the “fair market value” of the collateral plus interest as a secured claim and the balance of the claim (the unsecured portion) would only have to be paid the same percentage on the dollar as other unsecured claims like medical bills and credit cards. For example, if the debtor owed $20,000 on a car loan and the car was only worth $10,000, the debtor only has to pay the value of $10,000 plus interest and a small percentage of the remaining $10,000 (if a 10% plan, then only $1,000) as an unsecured debt. Debtors, therefore, can pay a lot less for their secured debts than what they owe under the contract.
The new laws limit the ability of debtors to take advantage of this part of the Chapter 13 laws. Under the new legislation, debtors will not be allowed to cramdown a car that was purchased within about 2 1/2 years of the filing. Also, debtors will not be able to cramdown other secured debts incurred within 1 year of the filing. Thus, debtors are only able to take care of these “cramdown” rules for older secured claims under the new laws. Recently incurred secured debt must be repaid in full at the contractual interest rate!
2) Disposable Income and Plan Length - Remember the means test from the last post? The means test is the test used to determine whether or not a debtor could qualify for Chapter 7 given the person’s median income for the same family size and certain “allowed” expenses. The new Chapter 13 laws provide that if a debtor’s income exceeds his state’s median income, certain restrictions also apply in Chapter 13.
First, if the debtor’s income exceeds the state’s median for the same family size and he is proposing to pay less than 100% with interest to his unsecured creditors, he must remain in Chapter 13 for five (5) years. This debtor could not file a 10%, 36 month Chapter 13 as he could have under the “old” law. Instead, this debtor will have to pay the proposed monthly payments over five years. For example, assume a debtor who has over the median income owes $50,000 to his unsecured creditors. Further assume this debtor only has $300 per month remaining in his budget after deducting living expenses. This debtor could not just pay $300 per month for three years and get a discharge, as he could under the “old” law. Under the “old” law this means he would have paid $10,800 and discharged the other $39,200 plus interest in Chapter 13. Under the “new” law, he’d have to pay $300 per month for five years, or $18,000 before he could get discharged from Chapter 13. This debtor would have to pay $7,200 more into Chapter 13 under the “new” law than he would have been required to under the “old” law.
Second, if the debtor’s income exceeds the state’s median income for the same family size, the debtor’s expenses she must use in determining what money the debtor has available to pay creditors, will be the means test expenses. Remember, those are the expenses provided by the IRS Collection Standards. Basically, this debtor will be treated under the bankruptcy laws as a tax cheater! She can only deduct from her income those expenses allowed under the means test. Her actual expenses, under the “new” law, are irrelevant!
3) Chapter 13 “superdischarge” - Another effect of the “new” legislation is to reduce the types of debts that can be discharged in Chapter 13. Currently, there are approximately 25 types of debts that can’t be discharged in Chapter 7 and 6 types of debts that can’t be discharged under Chapter 13 (thus the term “superdischarge”). Under the new legislation there will be 5 more types of debts that won’t be discharged under Chapter 13 bringing the total non-dischargeable debts in Chapter 13 to 11.
The expanded list of non-dischargeable debts in Chapter 13 includes credit card debts incurred through fraud or misrepresentation, death or personal injury caused by debtor’s willful or malicious conduct, late-filed debts arising from unfiled, late-filed or fraudulently filed tax returns, debts to creditors who were not notified in time for the creditor to file a proof of claim, and debts incurred by embezzlement or breach of fiduciary duty. Believe it or not, these types of debts could have been discharged in Chapter 13 under the “old” laws after the debtor did her best efforts to repay as much as possible.
Once again, this blog is just a brief overview of some of the changes and how they might affect you or someone you know. Of course, you should contact an attorney and discuss the specifics of your case and not just rely on general information published in this blog, but I hope you find the blog informative.
