Ask the Expert

November 2005

The New Bankruptcy Law

Now, if you’re hopelessly in the hole, it’s harder to get out

It’s called “The Bankruptcy Abuse Prevention and Consumer Pro-tection Act of 2005.” These names seem to get longer and longer and to have less and less to do with what the law actually does. This new law makes it harder to declare bankruptcy and forces people to pay more of their debts even if they are bankrupt. It took effect in October.

Bankruptcy is a last resort for people who cannot pay their debts. Most people file for bankruptcy because of a serious illness (affecting themselves or someone else), loss of a job, or divorce. There are two types of bankruptcy filings available to most individuals: Chapter 7 involves selling off most assets, using the money to pay off as much as possible of your debt, and then wiping out the rest of your debts. Which assets don’t you have to sell? That varies according to the state you live in. (You can see the list for your state at www.bankruptcyaction.com.)

The other type of bankruptcy, Chapter 13, allows debtors to discharge certain debts and pay off other debts over a period of three to five years rather than surrender other property.

What are the changes of the new bankruptcy law?

The new law:

• Includes a “means test” by which the IRS determines who can legitimately file for bankruptcy and who cannot. Those with lower income (below the median income for their state) may file a Chapter 7 bankruptcy. Those with income above their state’s median income who can pay at least $6,000 over five years ($100 a month) will be forced to file Chapter 13, under which a judge will order a repayment plan.
• Requires that people filing for bankruptcy pay for credit counseling.
• Places the burden of proof for bankruptcy on the debtor’s lawyer, requiring the attorney’s signature on the petition and verification that the attorney has investigated the claim sufficiently and found it to be solid.
• Broadens the definition of “nondischargeable” debts (those that can’t be erased through Chapter 7 filing) to include certain student loans, debts to state and local governments, and money owed to “governmental units.”

Will it cost more to file for bankruptcy?

Most filers used to pay a $209 court filing fee and $500 to $1,500 for an attorney to represent them in the simplest cases filed under Chapter 7. With the new law, the filing fee will rise and attorney fees will increase 30 percent to 40 percent because of the extra paperwork.

Are individual retirement accounts (IRAs) subject to the new bankruptcy rules?

No, the Supreme Court ruled last April 5 that IRAs are to be shielded from the reach of creditors in bankruptcy proceedings. The justices said IRAs fall under a bankruptcy code provision that exempts payments a debtor receives “on account of age,” such as pensions and annuities, when they are necessary to support the debtor.

—Doug Terwilliger, NEA Member Benefits

If you’re in serious money trouble …

… here are some resources that may help:

NEA Attorney Referral Program can supply the names of local attorneys. Call 202-822-7080.

American Bankruptcy Institute offers consumer information related to personal bankruptcy.

National Consumer Law Center provides expert consumer law advice for helping low income.

National Foundation for Credit Counseling is the nation’s largest and longest serving national nonprofit credit counseling network. Call 1-800-388-2227.

Personal Bankruptcy Information about federal and state laws related to personal bankruptcy.

Medigap Update

Federal authorities have changed the new Medigap Plans K and L since we wrote our September “Ask the Expert” column. Here are the changes:

• Medigap Plan K pays 100 percent of the Medicare Part A coinsurance and hospital benefits, 50 percent of the Medicare Part B Coinsurance or co-payment, and 50 percent of the blood benefit.

• Medigap Plan L pays 100 percent of the Medicare Part A coinsurance and hospital benefits, 75 percent of the Medicare Part B Coinsurance or co-payment, and 75 percent of the blood benefit.

Also, the Part B deductible, which is not covered under either Plan K or L, does count against the Plan K or Plan L out-of-pocket annual cost limit. 

Here's more on Medigap Plans K and L, visit www.medicare.gov.