OVERVIEW OF THE NEW BANKRUPTCY LAW
Of interest to those involved in health care, two major causes of bankruptcy are debt for medical treatment or a death in the family. There are two types of bankruptcy for individuals: Chapter 7 and Chapter 13. Chapter 7 allows debtors to keep some property (the exact property varies from state to state) while their other property is sold to pay off debts. Any remaining debt is cancelled, and the debtor is given a fresh start. Chapter 13 allows debtors to keep their house while they make a plan to pay off creditors.
The following are some of the changes in the new law that could negatively affect clients:
- The new law includes a means test to determine which chapter you can file under. If your income is above a certain level, you may not be able to file for Chapter 7. There is a formula to determine whether you can file for Chapter 7 or must file for Chapter 13. The means test won't affect very low-income seniors, but it could make it difficult for middle-income seniors to start over debt free.
- There are higher filing fees for Chapter 7. In addition, attorney's fees could be higher because filing is now more complicated.
- Under Chapter 13, there are higher standards for determining how much a debtor can afford to pay.
- Once you file for bankruptcy, the time period you have to wait before you can file again increased under the new law from 6 years to 8 years.
- The homestead exemption, which allows you to protect all or some of the equity in your home, is stricter under the new law, though it is unclear how it will be applied. Debtors can assert the homestead exemption if they have lived in the house for 1,215 days (3 years and 4 months) before filing. The federal exemption is $125,000, but states may have higher exemptions. If you bought the house within that time period, it isn't clear whether you can claim an exemption or not. Courts in different states have reached different conclusions on this issue.
- If you have lived in a state for less than two years, you can't assert a homestead exemption in that state. You must use the exemption from the state in which you lived the majority of time in the 180 days before the two-year period.
- You must undergo financial counseling at your own expense before and after you file for bankruptcy.
In addition to those changes, the new law does have some beneficial provisions for older Americans, including protecting retirement accounts up to $1 million and expanding the types of protected retirement accounts.
-Adapted from elderlawanswers.com newsletter January 2006 http://www.elderlawanswers.com/resources/article.asp?id=5093§ion=4&state
01/2006