Medical debts are the number-one cause of bankruptcy in america

Bankruptcy

Bankruptcy  may seem like the only option for some people, being that it is the  most widely known term in regards to financial crisis. For some of these  people, bankruptcy may be the only option. Please call us so we can  talk about your unique situation.


The New Bankruptcy Law
            Under the old rules, people who filed under Chapter 13 had  to devote all of their disposable income — what they had left after  paying their actual living expenses — to their repayment plan. The new  law adds a wrinkle to this equation: Although Chapter 13 filers still  have to hand over all of their disposable income, they have to calculate  their disposable income using allowed expense amounts dictated by the  IRS — not their actual expenses — if their income is higher than the  median in their state (see "Restricted Eligibility for Chapter 7,"  above). These expenses are often lower than actual costs.

            What's worse, these allowed expense amounts must be  subtracted not from the filer's actual earnings each month, but from the  filer's average income during the six months before filing. This means  that debtors may be required to pay a much larger amount of "disposable  income" into their plan than they actually have to spare every month —  which, in turn, means that many more Chapter 13 plans will fail.


Property Must Be Valued at Replacement Cost
            Under the old law, Chapter 7 filers could value their  property at what they could sell it for in a "fire sale" or auction.  This meant that used furniture, hobby items, cars, heirlooms, and other  property a debtor might want to keep were typically assumed to have  little value — and, therefore, that it often fell well within the  "exempt property" categories offered by most states. (Exempt property is  property that cannot be taken by creditors or the trustee — you are  entitled to keep it.)

            Under the new law, you must value your property at what it  would cost to replace it from a retail vendor, taking into account the  property's age and condition. This requirement is sure to jack up the  value of property, which means more debtors stand to have their property  taken and sold by the trustee.


Restricted Eligibility for Chapter 7
            Under the old rules, most filers could choose the type of  bankruptcy that seemed best for them — and most chose Chapter 7 over  Chapter 13. The new law will prohibit some filers with higher incomes  from using Chapter 7.


How High is Your Income?
            Under the new rules, the first step in figuring out whether  you can file for Chapter 7 is to measure your "current monthly income"  against the median income for a family of your size in your state. Your  "current monthly income" is not your income at the time you file,  however: It is your average income over the last six months before you  file. For many people, particularly those who are filing for bankruptcy  because they recently lost a job, their "current monthly income"  according to these rules will be much more than they take in each month  by the time they file for bankruptcy.
            Once you've calculated your income, compare it to the median  income for your state. (You can find median income tables, by state and  family size, at the website of the United States Trustee,  www.usdoj.gov/ust — Means Testing Information.)
            If your income is less than or equal to the median, you can  file for Chapter 7. If it is more than the median, however, you must  pass "the means test" — another requirement of the new law — in order to  file for Chapter 7.


The Means Test
            The purpose of the means test is to figure out whether you  have enough disposable income, after subtracting certain allowed  expenses and required debt payments, to make payments on a Chapter 13  plan.
            To find out whether you pass the means test, you start with  your "current monthly income," calculated as described above. From that  amount, you subtract both of the following:
            • Certain allowed expenses, in amounts set by the IRS.  Generally, you cannot subtract what you actually spend for things like  transportation, food, clothing, and so on; instead, you have to use the  limits the IRS imposes, which may be lower than the cost of living in  your area.
            • Monthly payments you will have to make on secured and  priority debts. Secured debts are those for which the creditor is  entitled to seize property if you don't pay (such as a mortgage or car  loan); priority debts are obligations that the law deems to be so  important that they are entitled to jump to the head of the repayment  line. Typical priority debts include child support, alimony, tax debts,  and wages owed to employees.
            If your total monthly disposable income after subtracting  these amounts is less than $100, you pass the means test, and will be  allowed to file for Chapter 7. If your total remaining monthly  disposable income is more than $166.66, you have flunked the means test,  and will be prohibited from using Chapter 7. So what about those in the  middle? They have to do some more math. If your remaining monthly  disposable income is between $100 and $166.66, you must figure out  whether what you have left over is enough to pay more than 25% of your  unsecured, nonpriority debts (such as credit card bills, student loans,  medical bills, and so on) over a five-year period. If so, you flunk the  means test, and Chapter 7 won't be available to you. If not, you pass  the means test, and Chapter 7 remains an option.
 

Requirements Eased for Hurricane Victims
            Following Hurricanes Katrina and Rita, the United States  Trustee's office announced special enforcement guidelines for debtors  affected by natural disasters. These guidelines are an effort to lessen  the impact of the new law on filers who may be displaced from their  homes and personal papers.
 

Among other things, these guidelines make the following changes for victims of natural disasters who file for bankruptcy:
            • Credit counseling will not be required.
            • Debtors who cannot provide required documents due to a natural disaster will not face enforcement actions.
            • Trustees are to consider the income loss, increased  expenses, and other effects of a natural disaster as "special  circumstances" that may allow a debtor who doesn't otherwise pass the  means test to qualify for Chapter 7.
            • Trustees will provide alternate means for debtors to attend creditors' meetings, if necessary.
            • For more on these rules, go to the website of the United  States Trustee, www.usdoj.gov/ust, and click "Enforcement Guidelines for  Debtors Affected by Natural Disasters."


Lawyers May Be Harder to Find — and More Expensive
            As you can see, the new law adds some complicated  requirements to the field of bankruptcy. This is going to make it more  expensive — and time-consuming — for lawyers to represent clients in  bankruptcy cases, which means attorney fees are going to go up.

The new law also imposes some additional  requirements on lawyers, chief among them that the lawyer must  personally vouch for the accuracy of all of the information their  clients provide them. This means attorneys will have to spend even more  time on bankruptcy cases, and charge their clients accordingly. Some  experts predict that this combination of new requirements may drive some  bankruptcy lawyers out of the field altogether.


Some Chapter 13 Filers Will Have to Live on Less
            Under the old rules, people who filed under Chapter 13 had  to devote all of their disposable income — what they had left after  paying their actual living expenses — to their repayment plan. The new  law adds a wrinkle to this equation: Although Chapter 13 filers still  have to hand over all of their disposable income, they have to calculate  their disposable income using allowed expense amounts dictated by the  IRS — not their actual expenses — if their income is higher than the  median in their state (see "Restricted Eligibility for Chapter 7,"  above). These expenses are often lower than actual costs. What's worse,  these allowed expense amounts must be subtracted not from the filer's  actual earnings each month, but from the filer's average income during  the six months before filing. This means that debtors may be required to  pay a much larger amount of "disposable income" into their plan than  they actually have to spare every month — which, in turn, means that  many more Chapter 13 plans will fail.


Property Must Be Valued at Replacement Cost
            Under the old law, Chapter 7 filers could value their  property at what they could sell it for in a "fire sale" or auction.  This meant that used furniture, hobby items, cars, heirlooms, and other  property a debtor might want to keep were typically assumed to have  little value — and, therefore, that it often fell well within the  "exempt property" categories offered by most states. (Exempt property is  property that cannot be taken by creditors or the trustee — you are  entitled to keep it.)
            Under the new law, you must value your property at what it  would cost to replace it from a retail vendor, taking into account the  property's age and condition. This requirement is sure to jack up the  value of property, which means more debtors stand to have their property  taken and sold by the trustee.


State Exemptions Aren't Available to Recent State Residents
            Under the old bankruptcy law, the personal property debtors  were allowed to keep in Chapter 7 bankruptcy was determined by the laws  of the state where they lived (as long as they lived there for at least  three months). Under the new law, you must live in a state for at least  two years prior to filing in order to use that state's exemption laws.  Otherwise, you must use the exemptions available in the state where you  used to live. Similar rules apply to homestead exemptions, which  determine how much equity in a home you can keep when filing for Chapter  7 bankruptcy. However, to use your new state's homestead exemption, you  must live there for at least 40 months.

Because exemption amounts vary widely from  state to state, these new residency requirements could make a big  difference in the amount of property you get to hold on to. For example,  if you recently moved from California to Nevada and you have a fairly  valuable car, you might want to wait to file for Chapter 7: Once you've  been in Nevada for two years, you can claim its $15,000 exemption for  motor vehicles. If you have to use California's exemptions, you can keep  only $2,300 worth of equity.





Disclaimer:To the best of  our knowledge this is up to date bankruptcy information as of January  1st 2009. Bankruptcy laws are frequently changing and this information  may not be up to date or fully accurate. We suggest you speak to a  bankruptcy attorney for the most up to date laws.   

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