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690 Flatbush Avenue West Hartford, CT  06110-1308

860 236-9350             800 856-6400  toll free     860 523-9101  fax

27 Holmes Avenue Downtown Waterbury 203 756-6100

 

The 2005 Bankruptcy Reform Act

    In 2005, after several years of intensive lobbying by banks, credit card companies and other lenders, Congress passed and the president signed a new bankruptcy law that made major changes in the rules for filing bankruptcy.

    The good news is that you can still file bankruptcy and that most people who file bankruptcy will still be able to free themselves of debt like they did under the old bankruptcy law.  The bad news is that the new bankruptcy law has made it more difficult and expensive to file bankruptcy.

    The new bankruptcy law will keep certain people with higher incomes from being able to file Chapter 7 Bankruptcy, which cancels most unsecured debt.  Instead,  these people will have to file a Chapter 13 Bankruptcy, which requires repayment of debts over time.  Most people who filed for Chapter 7 bankruptcy under the old law, however, would still have been able to file Chapter 7 under the new bankruptcy law.

    Congress gave the new bankruptcy law a nice sounding, altruistic name  the Bankruptcy Abuse Prevention and Consumer Protection Act (usually referred to as BAPCPA).  The new law, however, is not written to protect consumers but to protect credit card companies and other lenders.

    Studies show that most people file bankruptcy because they lose their jobs, become sick and have medical bills that they cannot pay, or have gone through a divorce.  Many people also wind up with too much debt by accepting the many credit card offers sent out by companies, then charging so much that they are only able to make minimum payments, and then missing payments that result in interest rates of 20% or higher.

    Despite the claims by the bank and credit card companies, very few people had the know-how to abuse the bankruptcy law by figuring out how to protect their assets from creditors and then running up a lot of debt and filing bankruptcy.

    Law professors sent a letter to Congress against the new law, stating that "The bill is deeply flawed, and will harm small businesses, the elderly, and families with children."  Attorney associations and many retired bankruptcy judges also spoke out against the proposed new law.

    The new bankruptcy law took effect with cases filed on or after October 17, 2005.  Below are the major changes put in place by this new law.

(Numbers in blue refer to Bankruptcy Code sections.)

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Credit Counseling.  Before you can file bankruptcy, you must receive credit counseling from an agency approved by the bankruptcy court.  §109(h);  §111;  §521(b)  (Click for a list of agencies in Connecticut.)
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The counseling can be done in person, on the internet or by telephone.

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Fees are usually about $50.

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The counseling usually takes 60 to 90 minutes.

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The counseling must be done within 180 days before filing bankruptcy.

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The agency will give you a certificate that must be given to the court when you file for bankruptcy.

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Personal Financial Management Instructional Course.  Before you can receive your bankruptcy discharge, you must attend a Personal Financial Management Instructional Course and provide the bankruptcy court with a copy of the certificate from the course.  §111;  §727(11);  §1328(g)  (Click for a list of approved course providers in Connecticut.)

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Means Test.  To be able to file a Chapter 7 Bankruptcy, which would cancel most unsecured debt, you must pass a test based on your income.  If your income is too high, you will have to file a Chapter 13 Bankruptcy, which will require you to repay part or all of your debt through a plan lasting from 3 to 5 years.  The test has 2 parts, Median Income and Income Minus Expenses.  §707(b)
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(1)  The Median Income Test:
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If your income is less than your state's median income, then you can file Chapter 7.

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As of April 1, 2013, the annual median income for a Connecticut family of 4 was $102,530.  For a person living alone the annual median income was $58,337.  (See the complete median income chart below.)

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The amount of your income used for this test is not your actual current income.  Instead, the amount is based on your income for the last 6 months before you filed bankruptcy.

 

Connecticut Median Income

As of April 1, 2013

Household

Size

Median Income

(Maximum Income to File Chapter 7)

Per Week Per Month Per Year

1

$1,122 $4,861 $ 58,337
2 $1,402 $6,073 $ 72,878
3 $1,661 $7,199 $ 86,390
4 $1,972 $8,544 $102,530
5 $2,116 $9,169 $110,030
6 $2,260 $9,794 $117,530
7 $2,404 $10,419 $125,030
8 $2,549 $11,044 $132,530
9 $2,693 $11,669 $140,030
10 $2,837 $12,294 $147,530

 
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(2)  The Income Minus Expenses Test:
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If your income is more than your state's median income, whether you can file Chapter 7 bankruptcy or must file Chapter 13 bankruptcy depends on how much you have left over each month after expenses.

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The amount of expenses used for this test are:
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Your payments on secured debt (such as a mortgage and car loan).

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Any secured debt payments you would have to make under a Chapter 13 Plan to keep your home, your car and any other property you need to support yourself and your family.

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Your other allowable expenses.  These are not your actual expenses but what the federal government says your expenses should be for food, utilities, etc..  These expenses are based on figures calculated by the IRS.

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If you have less than $100 left over each month after deducting your expenses from your household income, then you can file Chapter 7 bankruptcy .

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If you have more than $167 left over, then you must file Chapter 13 bankruptcy with a repayment plan that runs for 5 years.  The plan can be shorter if you pay all your unsecured creditors in full.

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If you have between $100 and $167 left over, then you must do the following calculation to see what kind of bankruptcy you can file:
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 If the amount left over multiplied by 60 is enough to pay 25% or more of your unsecured debt, then you must file Chapter 13.  You can choose a repayment plan that is anywhere from 3 to 5 years long.

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If the  amount left over multiplied by 60 is not enough to pay at least 25% of your unsecured debt, then you can file Chapter 7.

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Example 1:  Jason's unsecured debt is $40,000 and he has $150 left over each month.  25% of $40,000 is $10,000.  60 times $150 =is $9000.  This is not enough to pay the $10,000 (25% of Jason's unsecured debt).  Jason can file Chapter 7.

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Example 2:  Jessica's unsecured debt is $32,000 and she also has $150 left over each month.  25% of $32,000 is $8000.    60 x $150 = $9000.  This is enough to pay the $8000 (25% of Jessica's unsecured debt).  Jessica cannot file Chapter 7.  She can file Chapter 13 (or choose not to file bankruptcy).

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Time Between Filing Bankruptcy.  The time you must wait before filing a second bankruptcy case has been increased.  §727(a); §1328(f)  Additionally, if your bankruptcy case gets dismissed, you may have to wait 180 days before filing bankruptcy again, and even if you can file bankruptcy immediately, you may not be able to keep your creditors from taking your property.  (See the  filing bankruptcy again section on the FAQ page.)
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If you received a Chapter 7 Bankruptcy discharge before, you must wait 8 years to file Chapter 7 bankruptcy again and wait 4 years to file Chapter 13 bankruptcy and get a discharge.

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If you received a Chapter 13 Bankruptcy discharge before, you must wait 2 years to file Chapter 13 bankruptcy again and get a discharge.

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Unless a prior bankruptcy case was dismissed with an order requiring you to wait before filing bankruptcy again, you can always file a Chapter 13 bankruptcy case.  However, you cannot get a discharge in the Chapter 13 case if you received a Chapter 7 bankruptcy discharge during the last 4 years or a Chapter 13 bankruptcy discharge during the last 2 years.

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Automatic Stay Limitations.  The automatic stay, an order entered automatically by the bankruptcy court when a case is filed, stops foreclosures and most other collection actions.  Under the new bankruptcy law, the automatic stay is limited in a repeat bankruptcy.  §362(c)
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If your bankruptcy case is dismissed and you file bankruptcy again within 1 year, the automatic stay in your new bankruptcy case will end unless you have a hearing within 30 days and prove that you have filed the new case in good faith.  The new lbankruptcy aw assumes that the second bankruptcy filing is not in good faith.  You have to prove good faith by clear and convincing evidence.

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If you have 2 bankruptcy cases dismissed within 1 year and file bankruptcy again, the automatic stay does not enter at all unless you file a motion to have the stay enter and prove at a hearing that you are filing bankruptcy in good faith.  Again, the new bankruptcy law assumes a lack of good faith and your proof of good faith must be clear and convincing.

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The Bankruptcy Code does not define good faith.  In deciding if you are filing your bankruptcy case in good faith, bankruptcy judges consider whether you seem to have honest intentions, if you have completely and accurately disclosed information, if you have used your best efforts to pay creditors, and, if filing a Chapter 13 Bankruptcy, you do not seem to be filing just to delay creditors from recovering collateral and it seems you are reasonably able to complete a Chapter 13 Plan.

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Limits on Reducing Secured Debt on Car Loans.  If you file a Chapter 13 Bankruptcy, your Plan must provide for paying the entire loan amount if you bought the car within 910 days (2 1/2 years) before filing bankruptcy.  Under the old bankruptcy law, you could cramdown the loan by paying only the value of the car as a secured debt and treating the rest of the loan as unsecured debt§1325(a) 

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Homestead Exemption Limitations.  Bankruptcy law allows you to keep certain kinds of property up to certain amounts through the use of exemptions.  When filing bankruptcy, you have to choose between the exemptions allowed under federal law and those allowed under state law.  Most states have homestead (residence) exemptions that are much higher than under federal law.  Connecticut's homestead exemption is $75,000 per person.  Some states, such as Florida and Texas, have unlimited homestead exemptions.  The new bankruptcy law limits homestead exemptions as follows:
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You need to have lived in your state for at least 730 days (2 years) to use your state's homestead exemption.  If you moved during those 730 days, you can only use the exemption of the state in which you lived in for the majority of the 180 days (6 months) before those 730 days.  §522(b)

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If you bought your home within 1215 days (3 years, 3 months) of filing, you can only exempt up to $125,000.  That amount cannot include any equity that you had in a prior home and "rolled over" into your new home (by selling the prior home and using the profit to purchase a new home.)  §522(p)

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Household Exemption Limitations.  Bankruptcy law allows you to keep certain kinds of property up to certain amounts through the use of exemptions.
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The new bankruptcy law limits the amount of the "household goods" exemption to the following items: clothing, furniture, appliances, 1 radio,1 television,1 VCR, linens, china, crockery, kitchenware, your children's educational materials and equipment, medical equipment and supplies, your children's furniture, furniture for any elderly or disabled dependents, your personal effects, your children's toys and hobby equipment, your wedding rings, and 1 personal computer and related equipment.    §522(f)(4)(A)

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The new bankruptcy law specifically says that "household goods" does not include the following items:  works of art (unless created by you or a relative), electronic entertainment equipment with a total worth of more than $500 (except 1 television, 1 radio, and 1 VCR), antiques with a total worth of more than $500, jewelry with a total worth of more than $500 (except wedding rings), computers (except 1), motor vehicles (including tractors or lawn tractors), boats and other watercraft, motorized recreational device, and aircraft.  §522(f)(4)(B)

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You may be able to keep items that do not qualify as "household goods" by using other exemptions, including the exemption for any kind of property.  (See the exemptions section on the FAQ page.)

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Statement of Intent Requirements.  Under the new bankruptcy law, within 30 days after filing a Chapter 7 Bankruptcy, you must file a Statement of Intent telling the bankruptcy court what you intend to do with any of your property that secures a debt, such as a car that secures a car loan or a home that secures a mortgage loan.  Under the old bankruptcy law, if you simply continued making your payments on the debt, you could continue to keep the property.  Under the new law, you no longer have this option.  Instead, you must declare which of the following 3 things you intend to do with any such property.
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Redeem the property by paying the debt in full.

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Reaffirm the property by entering into an agreement promising that you will continue to pay and be responsible for the debt despite filing bankruptcy.

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Give up the property to the secured creditor.

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As of October 2009, however, Connecticut state law provides that filing bankruptcy shall not be considered a default of a retail installment contract or ground for repossession of such motor vehicle.  CGS 36a-785.

If you do not file a Statement of Intent on time, or file but do not redeem or reaffirm within 45 days after the the §341 meeting of creditors, the automatic stay ends as to the property and the secured creditor can take any action allowed by law to recover the property, such as foreclosing on a home or repossessing a car.  §521(a); §362(h)

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Increased Paperwork and Expenses.  The new bankruptcy law act makes filing for bankruptcy more complicated and expensive.  §521
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Bankruptcy attorneys must provide clients with certain disclosures (information) about filing bankruptcy.  §527

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Bankruptcy attorneys must investigate whether information provided by their clients is correct.  §707(b)(4)
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Bankruptcy lawyers may be fined and required to pay attorneys fees to creditors or the bankruptcy trustee if information is incorrect and a bankruptcy judge decides the lawyer failed to do an adequate investigation.

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To make sure that all assets and debts are listed with correct values, bankruptcy lawyers will have to charge clients for the time and costs of getting the following information:
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Credit reports.

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Appraisals of real estate.

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Real estate title searches.

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Court case searches.

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Along with the petition, schedules and other normal bankruptcy paperwork, which is about 20 to 30 pages, you must now file additional documents.  If you fail to file the first 4 documents listed below, your bankruptcy case will be automatically dismissed 45 days after you file bankruptcy (you can ask for an additional 45 day extension).  §521
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Pay stubs for the last 60 days.

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An itemized statement of your monthly net income.

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A statement of any increases in income or expenses that you expect over the next 12 months.

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Your credit counseling certificate and any debt repayment plan developed for you by the counseling agency.

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Statements for any education individual retirement account or similar state tuition program.

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At least 7 days before the meeting of creditors, the bankruptcy trustee (and any creditor that requests a copy) must receive a copy of your most recent tax Federal income tax return.  If the return is not received, your bankruptcy case will be dismissed.  §521(e)

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If requested by the court, the U.S. Trustee, or any creditor, you must file with the bankruptcy court a copy of any federal tax return that becomes due during your bankruptcy case.  §521(f)

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If requested by the court, the U.S. Trustee, or any creditor, you must file with the bankruptcy court a copy of any tax return that you should have filed during the 3 years before filing bankruptcy and that you then file during your bankruptcy case.  §521(f)

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Protection for Private Lenders of Student Loans.  Before the new bankruptcy law, only student loans that were guaranteed by the government were protected from bankruptcy.  Now, you must prove a hardship to discharge student loans regardless of whether the lender is the government, a nonprofit organization or a private company.  §523(a)(8)

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Luxury Goods and Cash Advances.  You usually cannot discharge debts that result from large cash advances or the purchase of what are considered luxury goods made too close to filing bankruptcy.  Such purchases are generally regarded as fraud.  Under the new bankruptcy law:
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The dollar amount for what are considered luxury goods drops from $1225 to $500.  The time period that is considered too close before filing bankruptcy increases from 60 to 90 days.  §523(a)(2)(C)

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The amount of cash advances that would give rise to a presumption of fraud drops from $1,225 to $750.  The time period that is considered too close before filing bankruptcy increases from 60 days to 70 days.  §523(a)(2)(C)

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Asset-Protection Trust.  The bankruptcy trustee can recover any property transferred, within 10 years of filing bankruptcy, into a self-settled trust with the intent to hinder, delay or defraud creditors.  §548(e)

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Chapter 13 Superdischarge Limited.  A Chapter 13 Bankruptcy debtor no longer can discharge debts related to tax returns that were filed late (within 2 years of filing bankruptcy), not filed at all, or fraudulently filed; to defalcation by a fiduciary; or to injuries caused willfully, maliciously or by driving while intoxicated.  §1328(a) 

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Retirement Plans Protected.  The new bankruptcy law protects pensions, tax-qualified retirement plans, profit-sharing plans and 401(k) plans, SEP’s and simple IRA’s from creditors.  Traditional and Roth IRA’s that are funded by the debtor are protected up to one million dollars.  §522(d)(12);  §522(n)

 

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