Friday, May 12, 2006

Myths of Bankruptcy

Ortiz: New bankruptcy law - 6 months later
By Nicholas F. OrtizThursday, May 11, 2006

As most people know by now, last year Congress enacted amendments to the bankruptcy laws. On Oct. 17, 2005, the president signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and, in so doing, modified the bankruptcy laws in the most significant way since 1978. About six months have passed since then, perhaps warranting a renewed look at the law after some dust has settled.

Something everyone can agree on is that the new bankruptcy law is complex. This may account for why there is so much misinformation out there. As a bankruptcy and consumer protection lawyer, I regularly talk to people who are overwhelmed by debt. This is my list of the top five myths about the new bankruptcy law:

Myth: Bankruptcy is no longer possible.

This is an easy one. BAPCPA amended the bankruptcy laws; it did not eliminate them. BAPCPA did make bankruptcy more difficult by creating new documentation and accuracy standards; however, the bottom line remains the same: people who cannot afford to pay their debts can get a fresh start free of most or all debts. Some of the misinformation on this point may be calculated. Some debt collectors, for example, have been telling people that bankruptcy no longer exists just to ratchet up the pressure to collect a debt.

Myth: People making more than the median income cannot file for bankruptcy anymore.

This myth involved the "means test," which is a creature of the new law. The purpose of the means test is to make people who are able to pay part of their debts. Although this has been presented as new, the truth is that people with consumer debts who could repay a reasonable amount were required for years to do so before the coming of the new law. The means test is just more technical. The means test applies to people who make more than the state median income. In Massachusetts, the median income for a single person is $47,176 and goes up by family size. (Exact numbers can be found at http://www.bkmass.com.) The means test is fairly complicated, but essentially asks whether a person should be in Chapter 13 (where you pay back part of your debts) or Chapter 7 (where you don't). If you can afford to pay some, you do. If you can't, you don't.

Myth: There is a difficult new credit counseling requirement under the new bankruptcy law.

The truth is that the new credit counseling requirement requires only nominal additional expense and time. My clients have spent, on average, about a half-hour over the phone fulfilling the prefiling credit counseling process. The bankruptcy system does not require people to deal with the type of credit counselors that have been in the news recently that have scammed people out of money. The U.S. Trustee has approved the credit counselors who can be used in the bankruptcy system.

Myth: I will lose all my property if I file for bankruptcy.

The reality is that although there have been some changes to the bankruptcy exemption scheme (based on residency and a few other things), the substantive exemptions still exist. What this means is that almost everyone will be able to keep all their property when they file for bankruptcy just as they did before the bankruptcy amendments.

Myth: Bankruptcy won't stop creditor harassment or lawsuits.

Bankruptcy still provides an automatic stay that stops the lawsuits, phone calls and other devices creditors and debt collectors use to collect debts. The automatic stay is central to bankruptcy and gives people the breathing room to go through the bankruptcy process without being hounded or harassed. BAPCPA makes some changes to the automatic stay with respect to notice requirements and repeat bankruptcy filers, but these changes will not impact most people and can be dealt with by experienced bankruptcy attorneys.

This article is not meant to minimize the changes under BAPCPA, but bankruptcy still exists and in most cases will provide the exact same relief it did before the change in the law. Bankruptcy often is the only reasonable way for people to deal with a situation in which they cannot pay their debts. Dealing with debt collectors and creditors after defaulting on debt remains worse than bankruptcy. It is more important than ever to retain an attorney who specializes in bankruptcy law who can steer you safely through the changes in the law.

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