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Understanding the new bankruptcy law
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  • Expenses: After excluding mortgage or rent payments, car payments, past due taxes and child support, and $1,500 in private school tuition, your attorney figures out whether the you can still pay $100 a month, or more, over the next five years to your unsecured creditors. Those expenses are based on IRS norms for such expenses, which may be way below what your expenses actually are.
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  • Bottom line: If your income is above the state median income, you must file under Chapter 13 instead of Chapter 7, unless the bankruptcy court rules that your circumstances are extraordinary. Even if you pass the first part of the means test and have an income lower than your state's median, if you can pay more than $100 a month of your unsecured debt over the next five years you have to file Chapter 13 -- unless the court rules that your circumstances are extraordinary.
  • "People like me and others raised a lot of questions about the means test while this bill was under consideration," says Plunkett. "It is very complicated and very restrictive. It could keep middle-class families, who have suffered legitimate financial difficulties, who have slightly higher income than what is allowed, out of Chapter 7."

    Howard Ehrenberg, a partner in the law firm SulmeyerKupetz in Los Angeles and a member of the Chapter 7 Bankruptcy Panel of Trustees, believes that many judges will use their discretion to allow debtors to file under Chapter 7 using these extraordinary provisions.

    "We're going to have to see how all this plays out over the next few years," he says. "It will still be up to the judge to decide if abuse exists, and the judge will be able to consider whether extraordinary circumstances exist."

    Residency requirements. Bankruptcy laws exist at both the state and federal level, and some states' laws are more favorable than both other states' and federal law. The new law is designed to prevent debtors from "jurisdiction shopping" to find the state with the most favorable laws, moving there and immediately filing bankruptcy.

    "The law is designed to keep people out of states, like Florida, that are more favorable to the consumer," says Robert Geller, an attorney with Robert M. Geller & Associates in Tampa. If you're living in a state for less than two years that has more-favorable provisions than the one you previously lived in, you can't use the more-favorable provisions.

    Collateral valuation. Your personal possessions, including furniture, clothes and electronics, will now be assessed at a higher value than they were previously assessed. The law mandates that these possessions, known as collateral, be assessed at their replacement value, taking age and condition into consideration.

    "Before this law, I would tell my clients to make a list of their stuff and the price it would get at a garage sale," says Tim Duggan, chair of the Bankruptcy and Creditors' Right Group at Stark and Stark, a law firm in Lawrenceville, N.J. "Now, you have to figure out what your TV and couch are worth. With cars, that is easy, just go to sites like Edmunds.com. But now, the client has to come up with replacement values and the attorney has to certify that these are correct. How do you do that without a professional appraiser?

     
     
    Next: "legal costs involved in a bankruptcy filing will double ... "
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