Mandatory Credit Counseling and Pre-Discharge Education by xru14808


									Changes for Filing Bankruptcy: An Addendum for In Over Your Head — Life-Saving Strategies for Financial Crisis

The Bankruptcy Abuse Prevention and Consumer              debt management program is recommended, you will
Protection Act of 2005 has several requirements           need to submit it to the court, along with a certificate
that will impact consumers who are considering            showing that you completed the counseling.
bankruptcy. There are three major changes in the
law. First, before filing for bankruptcy, a consumer       For a list of approved counselors in your area, go to
must obtain credit counseling from a government-          the United States Department of Justice Trustee office
approved counseling organization. Second, the new         web site at and click on Credit
law establishes rules for determining which type of       Counseling and Debtor Education. This site also lists
bankruptcy the consumer can file by implementation         the agencies and organizations authorized to provide
of a “means” test. And, third, an individual must         the pre-discharge educational program you will need
complete a financial education program before the          before your bankruptcy can be discharged. A two-hour
bankruptcy can be discharged.                             class provided by an authorized educational provider
                                                          is required before your bankruptcy can be discharged.
Mandatory Credit Counseling                               These classes may be offered in person or on-line.
and Pre-Discharge Education
                                                          The Means Test
Consumers filing for bankruptcy are required to go
                                                          Under the old bankruptcy law, you, the filer (usually in
through credit counseling offered by a government-
                                                          consultation with an attorney), determined which type
approved counseling organization within six months
                                                          of bankruptcy (Chapter 7 or Chapter 13) seemed best
of filing for bankruptcy protection. This required
                                                          for your circumstances. Under the new law, there are
counseling can take place in person, on line, or over
                                                          new rules to prohibit filers with higher incomes from
the phone. You can expect the counseling session to
                                                          using Chapter 7.
last about 90 minutes and will include an analysis of
your budget.                                              First, you must determine your income. This is not
                                                          your current income, but your average income from
The counseling organization will advise you on
                                                          the six months prior to filing. Compare this amount
managing your money and debts while developing a
                                                          to the median income for a family of your size in
budget. Sometimes the organization may recommend
                                                          your state. This data is available at the web site at
and negotiate a debt management plan (DMP). A
                                                 and click on the Means Testing
DMP allows you to deposit money each month with
                                                          information. If your income is equal to or less than
the counseling agency, which then uses the money to
                                                          the median, you can file a Chapter 7. If it is more
pay your creditors according to a schedule they have
                                                          than the median, you must pass the test using another
worked out with you and your creditors. A DMP is not
                                                          requirement of the new law.
required for filing bankruptcy, but if you do use one, a
copy must be provided to the bankruptcy court when        The second means test is designed to determine
you file.                                                  whether you have enough disposable income after
                                                          subtracting specific “allowed” expenses and debt
A credit counseling organization can charge a
                                                          payments to make payment on a Chapter 13 plan.
reasonable fee (possibly in the $50 range) for its
                                                          Using your “current monthly income” (the average
services. The primary purpose of the counseling is
                                                          income from the previous six months), you subtract:
to determine whether bankruptcy is necessary or
whether you can recover financially using an informal      1. Certain expenses in amounts set by the IRS. These
repayment plan. You are only required to participate         expenses include transportation, food, clothing,
in the counseling but not the repayment program. If a        etc. These amounts are not based on your actual
    expenses, but on an amount determined by the                     exemption laws, rather than the federal provisions.
    IRS. These amounts may be lower than your actual                 Previously, the state of residence could make a large
    expenses.                                                        difference in the property you were allowed to keep.
                                                                     To use a state’s homestead exemption, you must live
2. Monthly expenses you have for secured and higher                  there for at least 40 months prior to filing.
   priority debts. Secured debts are those for which
   a creditor may seize the property, such as a house                Under the new law, Chapter 7 filers must value
   or a car. Other priority debts include child support,             property at the replacement rate — what it would cost
   alimony, tax debts, and wages owed employees.                     to replace it from a retail vendor, although the age
                                                                     and condition can be considered. Under the previous
    If, after subtracting these amounts, your disposable             law, property was valued at what it could be sold
    income is less than $100 per month, you pass the                 for at auction or in a personal sale. This means that
    means test, and you may file for Chapter 7. If your               furniture, heirlooms, and other property that you
    remaining monthly disposable income is more                      might want to keep may not fall within the “exempt
    than $166.66, you don’t qualify for a Chapter 7 and              property” categories offered in most states. (Exempt
    must go to test No. 3.                                           property is property that cannot be taken by creditors
3. If your disposable income falls between $100 and                  or the trustee. You are entitled to keep it.) With the
   $166.66, you must calculate whether you have                      higher values expected for property under the new law,
   enough money remaining to pay more than 25%                       you are more likely to have your property taken and
   of your unsecured, non-priority debts over a five-                 sold by the trustee.
   year period. These debts include credit card bills,               Automatic Stay
   medical bills, and so on. If you have enough to pay
   this amount, you fail the means test and cannot file               The new law allows for landlords to bypass the
   a Chapter 7. If you cannot pay this amount, you                   automatic stay provisions of the previous bankruptcy
   can file a Chapter 7.                                              law. Landlords will be able to proceed with residential
Chapter 13 filers must pay all of their disposable
income to their repayment plan. Disposable income is                 This information highlights some of the major changes
your average six-month income prior to filing minus                   in the bankruptcy law with implications for consumers
the amounts allowed for living expenses based on the                 in fragile financial circumstances who are considering
IRS allowed expense amounts (not your actual costs).                 bankruptcy for relief from debts. To get detailed
The repayment period for a Chapter 13 is now five                     information regarding bankruptcy requirements,
years instead of the previous three years.                           rules, and the process, consult an attorney. For more
                                                                     information about changes in the bankruptcy law go
Exemptions and Property Values                                       to:
The new law requires that you be a resident of your
state for at least two years in order to use the state’s

Prepared by: Diane E. Johnson, Associate Professor, Extension Educator, Ohio State University Extension, Darke County.
Sources:     U.S. Trustee Program, Department of Justice; New Bankruptcy Law Requires Credit Counseling Before Filing,
             Federal Trade Commission; The New Bankruptcy Law, Nolo Press.
Disclaimer: This leaflet is intended to provide education and information and is not meant to provide legal advice, to be
             used in the practice of law, or to be a complete description of the law discussed. The reader should use his or
             her judgment in making competent financial decisions and in seeking the judgment and skills of competent legal

OSU Extension embraces human diversity and is committed to ensuring that all educational programs conducted by Ohio State
University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, age, gender identity or
expression, disability, religion, sexual orientation, national origin, or veteran status.

Keith L. Smith, Associate Vice President for Agricultural Administration and Director, Ohio State University Extension

TDD No. 800-589-8292 (Ohio only) or 614-292-1868                                                              Prepared: February 2006

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