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How the new bankrupcty laws affect investors

 

Question from one of our subscribers : I’ve been reading about some changes in the bankruptcy laws … what’s happening and how does it affect me as an investor?

Answer: Thanks for your question! We’ve been reading up on the upcoming changes in the BK laws and will be addressing these issues in this and future newsletters. In fact, we’ll expand this section and consider it part of our normal “Tip of the Month” so we can keep you up to date.

(1) The only change that has gone into effect immediately is the change in the homestead exemption rules. According to an online summary by CNN/Money:

“Currently, if you declare bankruptcy, the state where you file may allow you to protect from creditors some or all of your home equity. In Florida, for instance, your home may be entirely exempt, even if you bought it soon before filing. In Nevada, you may exempt up to $200,000.” (In Georgia, a single filer can exempt up to $10,000 and a couple can exempt up to $20,000).

“The new law, however, places more stringent restrictions on the homestead exemption. For instance, if filers haven’t lived in a state for at least two years, they may only take the state exemption of the state where they lived for the majority of the time for the 180 days before the two-year period.”

“Filers may only exempt up to $125,000, regardless of a state’s exemption allowance, if their home was acquired less than 40 months before filing or if the filer has violated securities laws or been found guilty of certainly criminal conduct.”

(2) Another significant difference is how the court will be determining whether a filer can/must file for Chapter 7 or 13. Under the new law, fewer people will be allowed to file Chapter 7 and more will be forced to file Chapter 13 and therefore, make payments to unsecured creditors. Again, according to an online summary by CNN/Money…

“Currently, it’s up to the court to determine if your case qualifies for Chapter 7 bankruptcy. Under the new law, your income will be subject to a two-part means test. First, it will be subject to a formula that exempts certainly expenses (rent, food, etc.) to determine whether you can afford to pay 25% of your “nonpriority unsecured debt” such as your credit card bills. Second, your income would be compared to your state’s median income.”

“You won’t be allowed to file for Chapter 7 if your income is above your state’s median and you can afford to pay 25% of your unsecured debt, said California-based bankruptcy attorney Stephen Elias, who is coauthor of the book “How to File for Chapter 7 Bankruptcy.” But, he said, you may be allowed to file for Chapter 13.”

“If your income is below the state’s median but you can pay 25% of your unsecured debt, you may be able to file Chapter 7, but the court can still require you to file Chapter 13 instead if it believes that you would be abusing the system by filing for Chapter 7, Elias said.”

“Under current law, the court has great latitude in deciding whether debtors may file for bankruptcy in consideration of their personal circumstances. Under the new law, there will be few if any exceptions made to the means test, no matter how sympathetic your case, said Leon Bayer, a bankruptcy attorney in Los Angeles.”

**Many of you may be wondering how the new law will impact you as a Post-Bankruptcy Report subscriber. The full bill takes effect in October, 2005. Experts say that we should expect to see a LOT more bankruptcy filings before that October date. The same experts predict a reduction in filings after October, which is what proponents of the bill are hoping for, but they don’t expect the drop-off to continue long-term. “The thing that makes people file for bankruptcy is not the statute. It’s lack of money, and that happens whether the bankruptcy code says X or Y. If you can’t buy food, you don’t worry about the niceties of the statute.”

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