In October 2005 sweeping amendments were made to the 1978 act that changed certain parameters for filing for bankruptcy. The law came into effect when George Bushed signed it.
The new act appears to have a deleterious effect on small businesses and individuals. Another facet of the new law where in entrepreneurs hoping for a fresh start by filing under chapter 7 will be belied as unfortunately they will not be able to get one. The result is what the bankruptcy act envisaged that bankruptcy should become a much less desirable option for those whose business has failed. With the passing of the new law debtors would be faced with more difficult options than before. With the new law it is harder for individuals to wipe out their debts in a bankruptcy.
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Previously, Chapter 7 was the preferred filing path for most people who needed bankruptcy protection. Their past debts were wiped off and the debtor could start life afresh. But the new law requires debtors seeking bankruptcy protection to file under Chapter 13. The new law would like that they pay back some of their debts if they have an income higher than the median income for their state. For this a means test has been specified and is the acid test to decide matters.
Under the old law, more than 90% of people filing for bankruptcy were able to get all of their debts discharged with no installment payments. However the new law will require people to file for bankruptcy under chapter 13 if they fail the means test and that means making payments in structured manner. Thus the creditors will be benefited in case the the debtor has a income above the median income of his state of residence.
The result of the new law is that there is likely to be fewer Chapter 7 filings for bankruptcy. As per lawyers the new means test could discourage some debtors from filing for protection at all. The basis of bankruptcy is to allow a fresh start, and if people are discouraged from filing they are still going to operate but they will go underground financially and find different ways of financing their lives. You will also have to remember that Chapter 7 does not discharge student loans, certain IRS debts, family obligations or criminal obligations.
If you decide to file Chapter 7, you will need to consult an attorney He will help you create documents clearly showing your creditors, assets, income and expenses. These schedules are signed by you and filed with the Court along with a voluntary petition for bankruptcy. Once these documents are filed the automatic stay of the Federal Bankruptcy Code immediately goes into effect.
It generally takes 3-4 months before the Bankruptcy Judge signs the discharge order. New Chapter 7 bankruptcy law has some good provisions but has also changed the concept of filing for bankruptcy
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