How Did Bankruptcy Change With the New Laws in 2005?

Before 2005 it used to be fairly easy and cheap to file bankruptcy. When the bankruptcy laws changed in 2005 the process for filing for bankruptcy became more complicated. Due to the complications of cases fees across the country for filing bankruptcy also went up.

Bankruptcy Questions

One of the main things that changed is the requirement to pass the “means test” in order to be able to qualify to file a Chapter 7 bankruptcy.  Generally speaking, if your average monthly income is less than the states median income, then you will pass the means test. If your average monthly income is more than the states median income, then there are a few other things that are taken into account to determine if you will pass or not. In this case, the means test looks into your income, expenses and the total amount of debt you owe. If that determines you have enough income to pay a certain amount to those creditors each month, then you will fail the means test. This means that you will not qualify to file a Chapter 7 bankruptcy but, instead, you can seek bankruptcy protection under a Chapter 13 bankruptcy.

Another thing that the new laws now require is the debtors have to provide proof of income. This means that they must provide their tax returns for the previous year to the trustee. If the previous years’ taxes have not been filed, they must get filed before the bankruptcy filing can proceed. This goes for both Chapter 7 bankruptcies and Chapter 13 bankruptcies.

The new laws also now require people who file bankruptcy take a credit counseling course and a financial management course.  These must be through government-approved agencies, so make sure to check with your attorney to find out which ones are government-approved.  If these companies suggest a repayment plan or other options, you do not have to follow them. For bankruptcy purposes you only have to be able to show that you have taken the course. A lot of debtors feel that these courses help and give them good information.

These are a few of the main changes that accompanied the bankruptcy law changes in 2005.

What is Cross Collateralization in Bankruptcy?

Cross collateralization is a clause in a purchase contract that secures a loan which serves as collateral for all other loans made with the borrower in the past, present, and future. This type of loan is usually found at credit unions, but can sometimes be found at  your typical banks.

Cross collateralization most commonly occurs with car loans. When you buy a vehicle from a bank or credit union you usually sign a security agreement that secures your car to the loan. This results in the lender holding the title to your car until you pay off the loan. If you default on the loan the bank or credit union can repossess your car. Most people are aware of this kind of agreement.

However there may also be a clause in the vehicle loan that ties any unsecured loans to that vehicle too. So if you later open a line of credit, a credit card account, or take out a personal loan from the same lender, those normally unsecured debts now become secured to your vehicle. If you decide to pay off your car loan to take possession of your car title, the credit union or other lending institution may not let you have the title until all your loans owed to them are satisfied. That means you could be paying much more for your car than you owe and probably more than it’s worth.

Writing a Check

This dilemma becomes particularly sticky in bankruptcy, especially if the debtor is trying to file a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy you either have to surrender your vehicle or reaffirm the debt. If you reaffirm the debt and your loan is with a credit union that has secured all other debts to your car you will have to pay those debts back too before you can keep you car. Normally those other debts would have been wiped out as unsecured debt in a Chapter 7. Most people who file bankruptcy don’t have the extra cash to pay of all of their debts.

One solution would be to file a Chapter 13 bankruptcy and repay your debts over a three to five year period. In a Chapter 13 bankruptcy the debtor can use the “cramdown” provision of the bankruptcy code. That allows you to pay the full amount of the value of the car and not all the other debts owed to the lender. The remaining debt is treated as unsecured debt and is discharged in bankruptcy.

Another cross collateralization trap can occur when a debtor has a loan and a checking account at the same lending institution. If he or she becomes past due on the loan the lender may access his or her checking account to pay the loan or freeze the account until it becomes current.

If you find yourself faced with this cross collateralization predicament your best choice may be to consult an experienced bankruptcy attorney who can discuss all the options with you.

What is Credit Counseling?


With the new bankruptcy laws in 2005, Congress passed legislation requiring a person filing bankruptcy to take a credit counseling course within the 180-day period preceding the date the bankruptcy case is filed with the court. A certificate of completion must be filed with your bankruptcy. Most of the approved credit counseling companies provide the course online and the fees vary by company. However, it is important that you take your credit counseling course from an approved credit counseling company.

Why Do I Have to Take a Credit Counseling Course?

Father and Daughter on ComputerIf you are considering filing bankruptcy, you are probably aware of the Bankruptcy Court requirement that you complete a credit counseling course prior to filing your bankruptcy, and that you complete a financial management course prior to receiving your discharge from your bankruptcy.

When the bankruptcy laws changed in 2005, one of the major changes was the new requirement of the credit counseling and financial management courses. One reason for these new requirements was so that debtors will be better informed and educated regarding their financial situation, budgeting, and obtaining credit.

While it is fairly easy to obtain the necessary credit counseling and financial management certificates, you must be aware of certain requirements and limitations.

First, your credit counseling and financial management certificates must be obtained through a Bankruptcy Court approved credit counseling agency. In other words, you cannot just find any credit counseling agency and obtain a certificate. You need to check with your attorney and/or local Bankruptcy Court to find out which credit counseling agencies are approved.

Second, there are time limitations for obtaining the necessary certificates. Your credit counseling course certificate must be obtained within 180 days prior to your bankruptcy filing. In other words, if you take the credit counseling course on January 1 and receive a certificate but do not file your bankruptcy petition with the Court until August 1, you will need to re-take the course and obtain a new certificate prior to the filing of your bankruptcy petition.

Your financial management course certificate must be obtained and filed with the Court prior to the entry of the discharge of your debts. This date is usually four to six months after you file your bankruptcy petition. As a good rule of thumb, you should take your financial management and file the certificate with the Court anytime between 10 days after the filing of your bankruptcy and prior to your first Creditors’ Meeting. By sticking with this time frame, you will avoid any potential discharge issues related to your financial management course.

Although the credit counseling and financial management course requirements may seem as though it is just one more hoop to jump through with your bankruptcy filing, most people find that the courses are actually helpful in planning for the future after your bankruptcy filing, so that you can receive a true fresh financial start.