Should You File Before October 17?

October 17, 2005 is the day the new bankruptcy law takes effect. Over the past few months, ever since this date has been announced, my office has been receiving an ever-increasing flow of new client questionnaires from potential clients. Most everyone assumes that they should file prior to the effective date of the new law. Is this correct thinking? For the most part, it probably is. After thorough reviewing the new law in preparation for a seminar I am teaching at the end of September, I have the following observations about the new bankruptcy law: 1. the "means test" is very restrictive. If your household income exceeds the average household income for your State (i.e. Georgia), the Bankruptcy Court will presume "abuse" and require you to file a Chapter 13 repayment plan. There are some "special circumstances" exceptions but don't count on those. Currently, the Courts ask whether your case has been filed in "good faith." I predict about 30% to 40% of people who can file a Ch. 7 today will not be able to file after October 17. 2. the tone of the new law reflects an attitude that debtors filing bankruptcy are abusing the system. It also reflects an attitude that debtor's lawyers are contributing to that abuse. 3. the new law is designed to make filing bankruptcy more intrusive and painful. For example, post-October 17 filers will have to enroll (at your expense) credit counseling and budget counseling courses. Bankruptcy petitions will have to include extensive supplementary documentation such as tax returns and proof of income. 4. the new law appears to have been written without much imput from bankruptcy lawyers or bankruptcy judges. There are numerous omissions and unknowns. For example, the means test applies if your income exceeds "the median income" for a like sized family in your State. However, the law does not tell us where to find the necessary statistics. The census bureau statistics describe median income for a family of four, but what if your family is smaller or larger. The census bureau also differentiates between income in rural areas and city areas, although the new bankruptcy law does not make such a differentiation. My sense is that the bankruptcy judges in our district will help us understand how this new law will be applied. But it may take 6 months to a year before we really know. In the meantime, do you want to be a test case for some provision of the new law?

UPDATE: I decided to leave this page on my blog for historical interest.  The new law has now been in effect for almost a year and I regularly file cases under the new law.  As I predicted back in August, 2005, filings under the new law are more complicated and burdensome.  Chapter 7 debtors whose gross income is under the "median" for similarly sized families generally do not have any trouble, but if your income is over the median, you should expect the U.S. Trustee to take a long look at your case and to possibly object.  We have not yet seen any modifications, but hopefully Congress will consider the feedback from consumer bankruptcy lawyers as well as the Bankruptcy bench.