A rush on bankruptcy courts

By Liz Pulliam Weston

The new bankruptcy reform law will achieve Congress' goal of a drop in filings -- but not before it prompted an unheard-of rush on the nation’s bankruptcy courts.

As the Oct. 17 deadline approached, Americans were filing for protection from creditors at a rate of 20,000 a day, according to Lundquist Consulting, which monitors filings. It was more than three times the number an average week would see.

"There are people lined up in the street (outside the courthouse) with their bankruptcy petitions in their hands. It looks like a rock concert," said Los Angeles attorney Scott Bovitz, a certified bankruptcy specialist, the week before the deadline. "Everyone who's a bankruptcy attorney is working flat-out."

Bankruptcy experts expect the number of filings to drop sharply as attorneys puzzle out the new law and courts change their software and procedures.

Few expect the lull to last, however. While bankruptcy is expected to be more expensive and complicated to file, there's little indication that fewer Americans will go broke.

Here's what you need to know about the new law:

You must undergo credit counseling

Before being allowed to file either Chapter 7 liquidation or a Chapter 13 repayment plan, debtors must prove they've attended, within the six months before filing, a credit-counseling program approved by the Department of Justice. You can find the list of approved providers here. For more information, read “How to pick a $50 credit counselor.”

Before your bankruptcy case is closed, you'll have to go through another round of education -- this time intended to teach you financial-management skills. You'll find the DOJ-approved list of debtor-education providers here. Failing to complete this education will result in your case being dismissed.

Exception: The DOJ has "temporarily" suspended the credit counseling and debtor-education requirements for areas most affected by Hurricane Katrina (basically Louisiana and the southern part of Mississippi). No expiration date has been given for the suspension, but presumably it will last until the DOJ decides enough providers are up and running in those areas.

You need these documents -- or else

Failing to provide certain documents within 45 days of your filing (with a possible 45-day extension) will cause your case to be dismissed automatically. In addition to the paperwork that used to be required -- lists of creditors, assets, liabilities, income and expenses -- you must also provide:

• Your credit-counseling certificate (see above)

• Your pay stubs for the previous 60 days (if any)

• Your most-recent tax return, plus any return filed while your case is pending and any returns filed for prior years that hadn't been filed when your case began

• A photo ID

Exception: The DOJ said it won't enforce this rule against filers who can't produce the documents because of natural disaster.

You can’t make too much money

The “means test” is what had many of those last-minute filers running scared -- even though most of them probably needn't have been worried.

The means test was ostensibly designed to prevent people who could afford to pay some of their debts from erasing them in a Chapter 7 liquidation filing. Instead, these folks would be shunted into a Chapter 13 repayment plan.

But only the filers who make more than the median income for their state (you can find the figures here) will be subjected to the means test. Your income is determined by taking your average monthly take for the previous six months, then multiplying that figure by 12.

Most filers, bankruptcy experts agree, make less than the medians, which range from $47,256 for a family of four in New Mexico to $88,401 for the same size family in New Jersey. If you make less, you won't face the means test and will be allowed to continue with your Chapter 7 filing.

If your income is above the median, more number crunching is in store. Certain "allowed expenses" for housing, utilities, food, clothing and other items are deducted from your income. What you actually spend on most of these items is irrelevant; what matters is what the IRS has set as a standard for these items. You can find more details here.

You're also allowed to deduct a variety of other "necessary expenses," including:

• Taxes, but not property or sales taxes
• Mandatory payroll deductions, but not 401(k) contributions
• Term life, dental, vision, health and disability insurance premiums, but not auto, liability, homeowners, renters or whole life premiums
• Child care, but not primary or secondary school tuition beyond $125 month per child
• Business expenses
• Charitable contributions

Continued: An exception for 'special circumstances'

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