Personal Bankruptcy Laws

Personal bankruptcy laws were created to protect the consumer and creditors. It provides a way for individuals suffering from extreme financial debt to reconcile personal debts and start again. The laws also exist to return at least some money owed to creditors, who often take a total loss when debtors default. These laws fall under Title 11 of the United States Code and are handled through federal district courts. Individuals can file under Chapter 7, choosing to sell assets in order to pay what is owed, settling the debt in four months or under Chapter 13 where they propose a three to five year repayment plan, usually covering only a portion of the debt. Debtors can choose to declare some or all current debts. After either process is complete, the declared debts are wiped clean.

The history of personal bankruptcy laws dates back to biblical times, when Moses declared the "year of jubilee." Every seventh year, the Israelites were to give their land and animals a year of rest or a "sabbath." After seven sabbath years, or 49 years, the whole nation enjoyed a year of freedom from all debt: loans, borrowed possessions, and slavery. "And ye shall hallow the fiftieth year, and proclaim liberty throughout all the land unto all the inhabitants thereof: it shall be a jubile unto you; and ye shall return every man unto his possession, and ye shall return every man unto his family... And if thy brother be waxen poor, and fallen in decay with thee; then thou shalt relieve him: yea, though he be a stranger, or a sojourner; that he may live with thee." (Leviticus 25:10, 35) It was a year of redemption, a year of starting over.

Laws have changed quite a bit since then. Individuals can file under Chapter 7 again after six years and under Chapter 13 any time. Many critics of personal bankruptcy laws in the United States claim that filing bankruptcy has been too easy on debtors. Bankruptcy filings in the 1980s and 1990s increased 300%. By the year 2000, millions of dollars each year were being lost in bankruptcy proceedings. Many Americans file after a personal crisis - a medical problem, divorce, or natural disaster. But thousands fine themselves in financial despair simply by overspending. This has caused concerned for many lawmakers, who tried for years to amend bankruptcy law to protect it from abuse.

On October 17, 2005, these lawmakers found victory in the Bankruptcy Abuse Prevention and Consumer Protection Act. This amendment to personal bankruptcy laws makes it more difficult for individuals to file under Chapter 7. Unlike past years, where a judge was the sole determinant of whether someone could file, debtors now have to pass a two-part test to qualify for Chapter 7. Salary is compared to a state median income as determined by the Internal Revenue Service (IRS). If a person falls below that median, he or she may qualify. A debtor's income also must leave less than 25% available to pay for non-secured outstanding debt. The formula allows for exemptions for needed expenses such as housing and food. But the intent of the additions to personal bankruptcy laws is to only make Chapter 7 filings available to those who really need it and forces everyone else to file under Chapter 13 thereby keeping them responsible to repay at least a portion of personal debt. Natural disasters and some other personal hardships can be taken into consideration.

The new act also incorporates other steps to help prevent further financial problems. Within six months before filing, individuals must meet with a credit counselor for a 90-minute session in the district where the bankruptcy will be filed. Before the debt is discharged further counseling sessions or money management classes are required. All expenses must be paid by the debtor. Some argue that most people filing for bankruptcy can't afford such classes and that they create a further hardship. Fees for filing under personal bankruptcy laws (around $200 to $300) can be made in payments to help alleviate some of the financial pressure, but installments are limited and must be paid within 180 after filing. Fees may be waived if the debtor's income is less than 150% of the poverty line. However, attorney fees must be paid and since the induction of the law, rates have increased 75% to 100%.

The new personal bankruptcy laws also put greater restrictions on homestead exemptions. Most states allowed individuals to protect home equity from creditors. Now, the law gives freedom for the states to impose individual restrictions. In some states, the debtor has the option to choose a state exemption over a federal exemption or vice versa. However, a filer must have lived in that state for a minimum of two years for state exemptions to apply. Individuals who file under Chapter 7 still risk losing their homes in the liquidation. Filers under Chapter 13 can usually retain them as long as they continue to make mortgage payments on time during the length of proceedings as well as other debt obligations under the written agreement.

Individuals who file under Chapter 7 or Chapter 13 of the personal bankruptcy laws work with a court-appointed trustee who manages the financial transactions with creditors. This impartial trustee meets with creditors, asks questions of both parties to reach a mutual plan of action, and makes sure that each party holds up the contract. When the terms of the plan have been fulfilled, the debtor is released from all remaining obligation to the creditor and then has the opportunity to start again.

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