Summary of the New Bankruptcy Law

posted Mar 8, 2012, 12:06 PM by Keith Carr   [ updated Mar 8, 2012, 12:15 PM ]
As you are probably aware, the “New Bankruptcy Law” was enacted affecting the ability of many individuals and small businesses to file for Chapter 7 bankruptcy. The New Bankruptcy Law refers to amendments to the Bankruptcy Code made in 2005, such amendments known as the Bankruptcy Abuse Prevention and Consumer Protection Act.

Chapter 7 is sometimes called a "liquidation" or "straight" bankruptcy. In Chapter 7, an individual or small business obtains a discharge of all debts after a bankruptcy trustee appointed by the court either liquidates the debtor's assets to pay creditors or determines that the debtor has no assets to pay creditors. An individual debtor or a small business debtor usually will not have assets that the trustee liquidates because assets are "exempt" under California law.  

If these individuals or small businesses cannot qualify for Chapter 7, they are relegated to filing Chapter 13 or Chapter 11 bankruptcies where they propose repayment plans.

The new bankruptcy law adds primarily three new requirements for filing Chapter 7. First, there is the gross income test. The debtor’s income cannot exceed the median income of the state of residence as specified in the census data provided by the Bankruptcy Court.  

If the debtor’s income does exceed this standard, then the second qualification is that he or she cannot have sufficient current net monthly income to pay creditors 25% of their claims over five years. If so, the debtor’s relief must be sought in either Chapter 13 or Chapter 11.

Finally, a Chapter 7 debtor’s discharge will be denied if the debtor received a previous Chapter 7 or 11 discharge within 8 years of the current case.