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Bankruptcy in Florida, Part 4

Continued from Bankruptcy in Florida, Part 3


Effects of BAPCPA, the ‘reform’ act of 2005

Under intense pressure from credit-card companies (and the banks that own them) and their lobbyists for about five years of hard-corner, back-room negotiations, Congress passed BAPCPA, designed to make it more difficult for consumers to file for bankruptcy protection. The idea was to make it tougher for individuals to file Chapter 7 (so-called “liquidation bankruptcy”), steering them toward Chapter 13 (so-called “reorganization bankruptcy” or the “wage-earner” plan).

Trustees and the ‘means test’

According to the Justice Department’s BAPCPA page, the act gave “the U.S. Trustee Program new responsibilities in a number of areas, including:

  • implementing the new “means test” to determine whether a debtor is eligible for chapter 7 (liquidation) or must file under chapter 13 (wage-earner repayment plan);

  • supervising random audits and targeted audits to determine whether a chapter 7 debtor’s bankruptcy documents are accurate;

  • certifying entities to provide the credit counseling that an individual must receive before filing bankruptcy;

  • certifying entities to provide the financial education that an individual must receive before discharging debts; and

  • conducting enhanced oversight in small business chapter 11 reorganization cases.”

Median income vs. finding of abuse

The trustee is now charged with more areas of ensuring the accuracy of filings and the determinations made under the means test and the disposable income test.

Before BAPCPA, income had no bearing on eligibility for Chapter 7. What comes into play now is the state’s median income, as determined by the Census Bureau (see Florida QuickFacts, Census Bureau). Basically, if your household income is higher than the Florida median income, you must satisfy the criteria of the means test in order to file under Chapter 7. This also puts you in the category of being subject to provisions against “abuse” of the bankruptcy code, whereas pre-BAPCPA law was framed in terms of “substantial abuse.” If abuse is found–subject to an appeal hearing–the Chapter 7 case can be dismissed (thereby exposing you once again to creditors) or converted to a Chapter 13 (or Chapter 11) filing.

Safe-harbor provisions, IRS criteria

If your household income (also relative to number of dependents) is below the median for Arizona, you have what is known as “safe harbor” from the abuse provisions and allows you to file under either Chapter 7 or Chapter 13. A sidenote: although Chapter 11 is commonly perceived as restricted to business reorganization, individuals with unsecured debt more than $336,900 are not eligible for Chapter 13 but can file under the more expensive–and more flexible–Chapter 11.) The means test uses the IRS national and local collection standards for determining household and living expenses.

Typically, a Chapter 7 bankruptcy turns out to be a “no asset” or “low asset” filing. In such cases, there’s simply not enough “stuff” for the trustee to sell (“liquidate”), and so the case proceeds onto discharge within a few months, usually about three or four. Also, in rare cases, a Chapter 7 filing can also help a debtor keep the home. Again, this varies from state to state, and is another reason to consult with an experienced bankruptcy attorney who’s not only familiar with the code but also with the asset exemptions in Arizona–plus the ins and outs of the various judges and local rules of the Florida district courts:

Next, in Bankruptcy in Florida, Part 5: state vs. federal exemptions, the meeting with creditors, undishchargeable debt.

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