New Jersey Bankruptcy law In Depth:
We must first consider the New Bankruptcy law (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005)
Means Test: The means test is designed to give debtors the relief they actually need and identify those who have the ability to repay a portion of their debts. The provisions relating to the means test in S. 256 would establish legal presumptions of abuse, adjustments to the means test criteria, and requirements for some debtors to reorganize under stricter Chapter 13 rules. These provisions would create more bright line rules and place limits on bankruptcy judges’ discretion. The bill also contains a “safe harbor” provision that may alleviate what some believe to be the harsh effect of the means test.
Some 2005 Major Provision Areas:
- Family Farm Reorganization
- Homestead Exemption
- Retirement Assets
- Privacy Protections
- Employee Benefit Plans
- Residential Leases
- Retiree Insurance Benefits
- Employee Benefit Plans
Safe Harbor: The safe harbor provision is designed to protect low-income debtors who might otherwise have their Chapter 7 cases dismissed because of the monetary levels created in the means test. The bill would require that the judge, U.S. Trustee, or bankruptcy administrator consider whether the debtor’s income is equal to or less than the highest national or applicable state median income in order to determine whether to seek dismissal of a Chapter 7 case.
Definition of “current monthly income.” S. 256 would exclude certain income from the means test, including Social Security benefits; payments to victims of war crimes or crimes against humanity; and payments to victims of international terrorism.
Living Expenses: To determine whether the presumption of abuse applies under section 707(b) of the Bankruptcy Code, the bill specifies certain monthly expense amounts that are to be deducted from the debtor’s “current monthly income.” The legislation would require a debtor to calculate expenses as specified under both Internal Revenue Service (IRS) “National Standards,” including subtracting an allowance of up to five percent for food and clothing if the debtor can demonstrate that such additional amount is reasonable and necessary, and IRS “Local Standards.” The debtor would also be required to calculate actual monthly expenses for the categories specified as “Other Necessary Expenses” issued by the IRS for the area in which the debtor resides.
Reaffirmation Agreements: A reaffirmation is an agreement made between a creditor and a debtor to continue paying off a debt even after the bankruptcy proceeding has concluded. S. 256 would require the U.S. Attorney and the Federal Bureau of Investigation (FBI) to investigate abusive reaffirmation practices. The bill would create a presumption of “undue hardship” if the debtor’s monthly income less their expenses does not leave enough to pay the reaffirmed debt. This provision exempts credit union creditors from the presumption. The bill would also require a Government Accountability Office (GAO) study and report to Congress on reaffirmation practices.
Definition of “household goods.” The legislation would adopt a more restrictive definition to include one radio; one television; one VCR; and one personal computer if used for the education or entertainment of a minor child. The definition does not include many children’s toys; family heirlooms of limited value; and other items.
Attorney Sanctions: If a U.S. Trustee brings a successful motion for dismissal or conversion, counsel for the debtor could be liable to reimburse the trustee for costs, attorneys’ fees, and payment of a civil penalty provided the court finds a violation of Bankruptcy Rule 9011.
Creditor Sanctions for an Improper Motion: [S. 256] would allow the court to award the debtor costs for contesting an unsuccessful motion to convert if the court finds that the motion violated Rule 9011, or was intended to coerce the debtor into waiving rights under the Bankruptcy Code. A small business creditor whose claim is less than $1,000 would not be liable for sanctions.
Mandatory Credit Counseling: The legislation would require debtors to undergo credit counseling within 180 days of filing, and may not obtain a discharge until completion of a personal financial management instructional course. The jurisdictional filing requirement could be waived for 30 to 45 days if the debtor certifies exigent circumstances or was denied service from an approved counseling agency.
Promotion of alternative dispute resolution: Under this legislation, a creditor’s allowable claim could be reduced by 20 percent if a court found that the creditor unreasonably refused to negotiate a reasonable alternative repayment schedule proposed by an approved credit counseling agency that provides repayment of at least 60 percent of the debt, and the debtor was able to prove by “clear and convincing” evidence that a creditor unreasonably refused to consider the offer.
Domestic Support Obligations: [S. 256] would move domestic support obligations to first priority, which is currently allocated to administrative expenses of the bankruptcy estate. Administrative expenses would become second priority. However, if a trustee is appointed under Chapters 7, 11, 12, or 13, the trustee’s expenses may be paid before domestic support.
Trustee Notification of Child Support Claim Holders: The bill contains language that directs the trustee to notify a priority child support recipient of the existence of a state child support enforcement agency, and, upon discharge, the existence of non-dischargeable and reaffirmed debt.
Family Farm Reorganization: Chapter 12 governs the reorganization of family farms, which expired on July 1, 2000. S. 256 would make these provisions permanent. The measure would impose a jurisdictional debt limit in an amount subject to readjustment in accordance with the Consumer Price Index (CPI) and subordinate certain high priority unsecured claims owed to the government to non-priority claims. The measure would also raise the jurisdictional debt limit of family farmers to $3,237,000, lower the percentage requirement of income derived from farming, and expand the time frame for measuring farm income from one to three years.
Homestead Exemption: Wealthy individuals to shelter millions of dollars in expensive homes to avoid repaying their creditors have used the homestead exemption. S. 256 includes a lengthened residency requirement to take advantage of state exemptions, an extension of the time to prove a fraudulent transfer to 10 years, and a cap on the homestead exemption to $125,000 in equity if the house was acquired within three and a half years of filing bankruptcy. The legislation would also impose a firm $125,000 cap on an individual who is convicted of specified felonies (including violations of federal securities laws) or who commits criminal acts, intentional torts, or willful or reckless misconduct that caused serious physical injury or death within 5 years preceding the bankruptcy filing.
Retirement Assets: The bill would exempt monies held in retirement funds from the bankruptcy estate, meaning that creditors cannot collect this money. The exemption is limited by an exception that allows creditors to collect money from retirement funds that are in excess of a million dollars and are from direct contributions and earnings on contributions made to an IRA or a Roth IRA.
Exemption for Saving for Postsecondary Education: Subject to certain IRS requirements, S. 256 would exclude funds up to $5,000 per specified beneficiary made within a year of filing in an education individual retirement account and/or any funds used to purchase a tuition credit or certificate under a qualified state tuition program.
Privacy Protections: [S. 256] would prohibit the transfer by the debtor of personal customer information unless approved by the court. The legislation also provides for the appointment of a consumer privacy ombudsman if a debtor wished to sell or lease such information.
Residential Leases: The legislation would add new provisions permitting a landlord/lessor to bypass the automatic stay to continue with a residential eviction of a tenant/lessee.
Employee Benefit Plans: Withheld wages for contributions to employee benefit plans would be excluded from the debtor (employer’s) estate.
Disclosure: The legislation would amend the Truth in Lending Act (TILA) to require enhanced minimum payment disclosures under an open end credit plan; enhanced disclosures regarding the tax deductibility of credit extensions which exceed the fair market value of a dwelling for credit transactions secured by the consumer’s dwelling; disclosures related to introductory “teaser” rates; disclosures related to Internet-based open end credit solicitations; and disclosures related to late payment deadlines and penalties. TILA would also be amended to prohibit the termination of a credit account because the consumer has not incurred finance charges.
Non-dischargeable Consumer Debts: The legislation would extend the number of loans deemed nondischargeable including, qualified educational loans defined under section 221 of the Internal Revenue Code; loan repayments to debtor’s savings/retirement plan for debtor’s wages; fines and penalties under federal election law; debts incurred to a third party to pay a tax to a state or local government unit; and debts owed to a single creditor for certain luxury good incurred within 90 days of filing.
Retiree Insurance Benefits:[S. 256] would amend the current Bankruptcy Code to allow the court to reinstate retiree benefits that are modified by a debtor within 180 days prior to the bankruptcy filing unless the court finds that the balance of equities supports such modifications.
Nursing Homes: [S. 256] would require the appointment of a patient ombudsman to act as an advocate for patients of health care organizations, and it would require that the bankruptcy trustee use his or her best efforts to transfer nursing home residents when health care organizations close due to bankruptcy.
Judgeships: The conference report would create new temporary bankruptcy judgeships for designated districts.
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