The 2005 Bankruptcy Law requires individuals to go through credit counseling
at least six months before they file for bankruptcy, and attend money
management classes before their debts are discharged, all at the filer’s own
expense. This will slow down the process a great deal, and supporters hope it
will give people ample time to educate themselves and consider alternatives to
bankruptcy. The obvious drawback is that it forces people who believe they are
no longer capable of paying their debts to live with that debt for another six
months and to pay for counseling and classes.
Homestead Exemption
Under the old bankruptcy system, there was a great deal of attention paid to
celebrities and CEOs who would declare bankruptcy, but somehow manage to keep
their million dollar homes. States like Florida,
Iowa, Kansas,
and Texas had unlimited homestead
exemptions. In other words, a person could use all their money to buy a mansion
in one of those states, then declare bankruptcy and have their debts wiped out
because they had no free cash to pay the creditors. Under the new law, if a
filer bought their home within three years and four months of filing for bankruptcy,
the homestead exemption would be limited to $125, 000, regardless of what state
the home is in.
Attorney Liability
Along with the means test, the other aspect of the 2005 law that has created
the most controversy is attorney liability. If an individual’s bankruptcy
filing is dismissed due to inaccurate financial information, there are steep
fines that can be levied against the attorney handling the case. The aim here
is to limit the fraud that some say is rampant in the current bankruptcy system.
However, attorneys will now have to investigate each of their clients to ensure
nothing in the financial information is wrong or inaccurate. Many attorneys who
have offered low-cost bankruptcy services in low income areas will probably no
longer be able to afford to do so. Some analysts suggest the cost of hiring a
bankruptcy attorney will rise significantly, in some cases as high as $2,500.