Bankruptcy reform preserves fresh start

But what has really changed?

Months prior to the new bankruptcy laws going into effect, there were cries from people who needed to file bankruptcy, and from attorneys, that “the sky was falling,” and that very few individuals would be able to file after the law changed. Further cries were made that credit card debt could no longer be discharged and that the cost of filing bankruptcy would be so high that it would prohibit many people from filing altogether.

In reality, none of this has been the case, and what bankruptcy attorneys have found is quite the opposite. In fact, under these new bankruptcy laws, it may actually be easier for a person to file a Chapter 7 bankruptcy, commonly called the “fresh start bankruptcy,” and avoid a Chapter 13 bankruptcy, which imposes a repayment plan to the filer's creditors.

What has happened to the cry of impending doom bemoaned by all who reviewed the changes to the bankruptcy laws?

The answer to that question lies in the newly implemented means test.

The means test is a mathematical formula that was pushed through Congress by credit card companies in an effort to force people to pay back something to their creditors as opposed to paying nothing and canceling the debt under a Chapter 7 bankruptcy.

The problem with the means test is that just prior to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act, the secured creditors' lobbyists pushed changes to the means test to allow a person to subtract secured loan payments made by the person from their gross income, thus reducing their overall income below the state median income.

The state median income by family size is now the threshold in determining whether a person is required to attempt a Chapter 13 repayment plan or whether the person can file for Chapter 7 to cancel the debt.

In Missouri, the state median income for a family of four is $60,528. As a result, people find themselves more likely to qualify for a Chapter 7 bankruptcy than before the changes in the law.

Yes, there are some other minor requirements that the filer must comply with before filing bankruptcy, such as providing the court with their last two months of income records and the past year's tax return, and a requirement to attend a credit counseling course. But overall, these are merely minor inconveniences to the person filing bankruptcy.

Bankruptcy is alive and well in the United States, and particularly in southwest Missouri.

Debtors who are burdened with monthly credit card payments bearing high interest rates, uninsured medical debt that they can no longer pay and control, and other financial obligations still have a relief valve in bankruptcy. In fact, it is probably easier now to use bankruptcy for that financial fresh start it was meant for when created by Congress many years ago.

Kenneth P. Reynolds is a partner with Reynolds, Gold & Grosser PC. He can be reached at kenreynolds@rgglaw.net or www.rgglaw.net.