The difficult decision to file bankruptcy has become even more stressful for individuals. The Bankruptcy Abuse Prevention and Consumer Protection Act went into effect Oct. 17 with significantly tougher reporting and qualification requirements.
The most highly publicized aspect of the new law involves tough new restrictions on who may qualify for Chapter 7 bankruptcy, the most common form of individual filing that allows consumers to erase their debts.
Yet advisers say it’s important to understand one important fact-your own state laws might override certain parts of the new federal restrictions, making the payment and asset-retention outlook for debtors better or worse than they would be strictly under the letter of the federal law. That’s why it’s critical that potential filers get the advice of a qualified local bankruptcy attorney, a a certified financial planner or a tax professional- and sometimes all three.
Here are some basic questions to ask about filing for bankruptcy and how the new law may affect the assets you have under your control:
What are the most important changes involving Chapter 7?
New federal requirements for the most popular category of individual bankruptcy -Chapter 7-now impose an income test (also known as a “means test”) that includes the following:
If the debtor’s average monthly net income for 60 months is greater than $10,000, he or she won’t be able to file under Chapter 7.
If the debtor’s average monthly net income for 60 months is less than $6,000, then filing will likely be permitted.
If the debtor’s average monthly net is between $6,000 and $10,000, the debtor can file under Chapter 7 only if net monthly income is less than 25 percent of all non-priority unsecured debts.
Filers will also have to supply proof that they’ve completed six months of consumer credit counseling, preferably with a payment plan. These detailed reporting requirements will show if you were running up your credit cards before filing or acting irresponsibly in other ways.
Has documentation changed?
Tremendously. Under old Chapter 7 requirements, filers needed to file a relatively basic list of assets and debts, a list of current income and expenses and an overall statement of financial affairs. Now, it gets more complicated.
The courts want to see tax returns and detailed projections of earnings. They’ll want to see assets in retirement accounts and even educational accounts such as 529 college savings plans.
What about home-ownership issues?
If you want to use a new state as your domicile, you have to live there for 730 days. However, regardless of what state laws apply, the new bankruptcy act states that you must live in a home for 1,215 days (40 months) to receive your state’s homestead exemption. Otherwise, protection for the home is capped at $125,000.
In addition, there’s a 10-year review period to determine if the debtor attempted to transfer money or equity into a homestead with the intent to hinder, delay or defraud a creditor.
What about retirement assets?
For filings on or after Oct. 17, retirement funds that are exempt from taxation (including qualified plans, qualified annuities, IRAs, Roth IRAs or deferred compensation plans) will likely stay exempt in bankruptcy. However, funds in a traditional or Roth IRA (but not SEP plans or SIMPLE IRAs) are exempt only up to $1 million. Again, check state law.
What about education savings?
All money held in a Coverdell education savings account or a Section 529 college savings plan for more than two years is protected from payment of bankruptcy debts as long as the account beneficiary is a child, a stepchild, grandchild or stepgrandchild.
Where can a consumer find advisers?
One resource for bankruptcy attorneys is the American Board of Certification, (www.abcworld.org), which provides a state-by-state listing of certified attorneys in bankruptcy law.
The National Foundation for Credit Counseling (www.nfcc.org) lists not-forprofit consumer credit counseling agencies nationwide.
Advisers can also be located through the Financial Planning Association at www.plannersearch.org. All references should be checked locally.
Coan is managing partner with Wealth Planning & Management LLC, an Indianapolis-based investment advisor, and author of “Asset Protection and Wealth Preservation.” Views expressed here are the writer’s.