Leo M. Gibbons, Esquire

As of October 2005, debtors will find it more difficult to discharge debts

For Chester County residents filing for bankruptcy, the Bankruptcy Law recently passed by Congress and signed by President Bush brings major changes. The new law, effective as of October 2005, makes it much more difficult for debtors to discharge their debts. It also gives creditors greater ability to contest a debtor's bankruptcy and gives unsecured creditors, particularly credit card companies, an increased likelihood of recovering a portion of the money owed to them by debtors.

Under the old law, many debtors were able to file for bankruptcy under Chapter 7 of the Bankruptcy Code, in which all of a debtor's unsecured debt is typically discharged and the debtor does not have to make any payments to the creditors holding this unsecured debt. Chester County residents filing a Chapter 7 bankruptcy would typically only attend one meeting (held in West Chester) of creditors accompanied by a bankruptcy trustee appointed by the court.

Under the new law, far fewer debtors will be able to file a Chapter 7 bankruptcy but instead will be forced to file a Chapter 13 bankruptcy in which they must make payments, a portion of which ultimately will be received by their unsecured creditors to pay off a portion of the debtor's unsecured debt. These payments will last for a period of three to five years. Additionally, a Chester County resident forced to file a Chapter 13 bankruptcy will also need to make at least one trip to Philadelphia to meet with the court appointed bankruptcy trustee. He or she also may have to make additional trips to Philadelphia in order to have the repayment plan approved by the Bankruptcy Court.

Chapter 7 Versus Chapter 13 Bankruptcy
Under the new law, whether a debtor can file a Chapter 7 or a Chapter 13 bankruptcy is determined by a two-part means test. Under the first part, a debtor's monthly expenses are strictly limited and the court may require the debtor to eliminate or greatly reduce spending on certain items. A debtor's expenses will be scrutinized to determine whether he or she can afford to pay 25 percent of the "non-priority unsecured debt" such as credit card bills.

In the second part of the test, the debtor's income is compared to his or her state's median income. If the debtor's income is greater than the state's median income, the debtor may be required to file a Chapter 13 bankruptcy in which debtor makes payments under a plan for a period of 30 to 60 months. A debtor will not be allowed to file a Chapter 7 bankruptcy if debtor's income is above the state's median and debtor can afford to pay 25 percent of debtor's unsecured debt based on debtor's allowed expenses. Even if a debtor's income is below the state median but the debtor can afford to pay 25 percent of debtor's unsecured debt, the court can still require a debtor to file a Chapter 13 bankruptcy.

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