Q: What are the most substantive changes in the law?

A: The following is only a few of the MAJOR changes to the bankruptcy law:

1. The new bankruptcy legislation likely to severely limit the ability of a debtor to file a Chapter 7 bankruptcy as compared to a Chapter 13. Specifically, the law requires a “means test” that will make Chapter 7 filings unavailable for most people whose incomes exceed their states' median incomes. Anyone whose income is above the median, earns a salary and has $100 left over every month after paying for his or her basic needs must file under Chapter 13. Debtors that make less than the median income may still file for Chapter 7. Under Chapter 13, as more specifically described below, a monthly repayment plan is established and confirmed by the bankruptcy court. The debtor must follow for five years. Currently, most people file under Chapter 7, which doesn't require repayment and under which most of the unsecured debt, such as credit cards and medical bills, is erased. People who make less than the median income could still file for Chapter 7.

2. Those consumers who are thinking about filing bankruptcy will be required to get credit counseling from an approved credit-counseling agency for up to six months before filing for bankruptcy. Debtors also will be required to take a financial-education course within 18 months after filing bankruptcy before their debt can be discharged.

3. The new law also requires a Chapter 13 plan must provide that a secured creditor retain its lien until the payment of the entire debt, not just the secured portion, where the creditor holds a security interest in a motor vehicle purchased within 910 days of the filing.

4. Debts for trust fund taxes, taxes for which returns were never filed or filed late (within two years of the petition date), taxes for which the debtor made a fraudulent return or evaded taxes; fraud and false statements under §523(a)(2), unscheduled debt under §523(a)(3), defalcation by a fiduciary under §523(a)(4), domestic support payments, student loans, drunk driving injuries, criminal restitution and fines and civil restitutions or damages rewarded for willful or malicious personal actions causing personal injury or death are now excepted from discharge. Under the old law, these debts may have been available for discharge under a Chapter 13 plan of reorganization.

5. Chapter 7 Debtor cannot receive a discharge if a prior discharge was received within 8 years (rather than 6) of the new filing.

6. Changes to the law that provides for the Automatic Stay (see below) have also been added, which may allow creditors from taking certain actions (under specified circumstances) without first asking the bankruptcy courts permission.

Q: When will the new law take effect? Should I file now?

A: Most of the new law will not be effective until six months after the law is signed by President Bush. If you are considering bankruptcy, you should consult with a bankruptcy attorney immediately in order to evaluate your particular financial situation.

Q: What is the “Automatic Stay”?

A: The “Automatic Stay” is one of the most important advantages of a bankruptcy filing for the debtor. It is a federal injunction that is effective IMMEDIATELY upon the filing of a bankruptcy petition by the debtor with the bankruptcy clerk and prohibits any creditor from, without first getting the bankruptcy court’s permission, pursuing or continuing any collection activity against the debtor including: filing a lawsuit, garnishing wages and/or bank accounts, repossessing collateral, foreclosures and placing collection calls to the debtor. In a Chapter 13 case, the automatic stay also prohibits any creditor from pursuing or continuing any collection activity against any co-debtor or “co-signor”. HOWEVER, THE NEW LAW PROVIDES FOR SOME EXCEPTIONS TO THE AUTOMATIC STAY AS IT RELATES TO CERTAIN CREDITORS.

Q: What is Chapter 7?

A: Chapter 7 bankruptcy, sometimes call a “straight bankruptcy”, is a liquidation proceeding. In a Chapter 7, the debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all debts available for discharge (see below) usually within four months, so Chapter 7 will give the debtor a relatively quick "fresh start".

The most common reasons for filing a Chapter 7 bankruptcy are: unemployment, large medical expenses, seriously overextended credit, marital problems, and other large unexpected expenses.

Q: What is Chapter 13?

A: Chapter 13 Bankruptcy is also known as a reorganization bankruptcy. Chapter13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years. This type of bankruptcy is advantageous to individuals who have non-exempt property that they want to keep. It also provides a method for a debtor to cure past due payments on the debtor’s house by paying the full amount of the arrearage over time. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

Q: If I file bankruptcy, will I lose my house?

A: The answer to this question depends upon the circumstances and particulars of your case. In many cases, steps can be taken to protect your house. If you are considering bankruptcy, you should consult with a bankruptcy attorney immediately in order to evaluate your particular financial situation.

Q: What other property can I keep? What are “exempt assets”?

A: Exempt assets are determined either by state or federal law. A debtor who resides in the State of Texas may claim the following as exempt assets:

The debtor's homestead (subject to new federal restrictions for equity in the homestead accumulated within 1215 days of filing);
Personal property of a debtor which may be claimed as exempt include: home furnishings, family heirlooms, provisions for consumption, farming or ranching vehicles and implements, tools, equipment, books, motor vehicles used in a trade or profession, wearing apparel; jewelry two firearms, athletic and sporting equipment, household pets, current wages for personal services, professionally prescribed health aids of a debtor or a dependent, alimony, support, or separate maintenance received or to be received by the debtor or for the support of his dependent, and qualified retirement plan, annuity or account.

This is not a complete list and a number of restrictions do apply. These exemptions are not available in all situations. You should consult a bankruptcy attorney in order to properly determine if your property may be claimed as exempt assets.

Q: Can I keep some accounts open after bankruptcy?

A: In some circumstances, the bankruptcy code the debtor may “reaffirm” a debt. Whether a debtor can keep debt account open (such as credit cards) after filing bankruptcy is up to the creditor If you are discharging the debt, the account will be closed (and the credit card canceled).

Q: How will filing a bankruptcy affect my credit?

A: The fact you filed bankruptcy stays on your credit report for 10 years. However, a number of banks now offer "secured" credit cards where a debtor puts up a certain amount of money (as little as $200) in an account at the bank to guarantee payment. Usually the credit limit is equal to the security given and is increased as the debtor proves his or her ability to pay the debt. Additionally, many creditors treat a Chapter 13 debtor more favorable than a Chapter 7 debtor.

Q: How will filing a bankruptcy affect my employment?

A: The bankruptcy laws prohibit any employer from discriminating against you because you filed bankruptcy.

Q: What debts are available for discharge through bankruptcy?

A: The following debts are not erased or “discharged” in either a Chapter 7 or a Chapter 13. If you file for Chapter 7, these will remain when your case is over. If you file for Chapter 13, these debts will have to be paid in full during your plan. If they are not, the balance will remain at the end of your case. This is not a complete list and the new legislation has made some additional changes that are not reflected in the list below.

Debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case;
Child support and alimony;
Debts for personal injury or death caused by your intoxicated driving;
Student loans, unless it would be an undue hardship for you to repay;
Fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution
Recent income tax debts and all other tax debts.
Debts you incurred on the basis of fraud, such as lying on a credit application;
Credit purchases for luxury goods or services made within 90 days before the filing of the bankruptcy petition;
Loans or cash advances taken within 90 days before the filing of the bankruptcy petition;
Debts from willful or malicious injury to another person or another person's property; and
Debts from embezzlement, larceny or breach of trust.

This is not a complete list and the new legislation has made some additional changes that are not reflected in the list above.

Q: Do I need to have an attorney in order to file bankruptcy?

A: No. You may represent yourself in bankruptcy court. However, as the bankruptcy laws are very complicated and complex, consultation with a bankruptcy attorney is well advised. Villa & White LLP, as well as many other bankruptcy law firms, offer a free initial consultation in order to better advise you of your rights under the bankruptcy code.