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The "Bankruptcy Reform Act"

Eleigibility Changes for Chapter 7 or Chapter 13
Features of the 2005 law
Where to get the required credit counseling


Changes to Eligibility for Chapter 7 or 13

When the "reforms" went into effect in late 2005, we had a bit of a scare. It looked as if hardly anyone would ever qualify for any kind of bankruptcy. That turned out to not be true. In fact for several of the years since 2005, bankruptcy filings in Minnesota were at record highs. The paperwork has become a lot more complicated, but most people who need to are still able to file. If you don't qualify for a Chapter 7, you should be able to qualify for a Chapter 13. For lots of people Chapter 13 is better than Chapter 7, because it can be used to get a mortgage up to date or to repay taxes on favorable terms.


Passing the means test, which is perhaps the most fearsome part of the law, is only required in consumer Chapter 7 bankruptcies; and it is only required for those who are above the median income for the state in which they live. The median income figures for Minnesota are on my Chapter 7 Bankruptcy page. Most of my clients have income below these figures and are affected in only small ways by the provisions of the 2005 law.


Early on there was a lot said - much of it misleading - about a provision of the law which says that if the debts are not mostly consumer debts but are primarily business-related, the means test is not required. It turns out that for most people who seem to have primarily business debt, a means test still is required if their income is above median. This is because of the sad fact that in calculating whether a person's debts are primarily business related, the mortgages on one's home have to be included in the mix. So a person with $100,000 of business debt and a mortgage of $200,000 still has debts which are considered two-thirds personal. With that kind of analysis going on, this exception for business debt doesn't seem to really be helping very many people - or at least not anybody I know.


Features of the 2005 law

The features of the legislation most likely to affect my clients appear to be the following:


1.  To be eligible for bankruptcy relief of any sort, an approved Financial Counseling course is required within six months prior to filing. Then before the discharge is granted, another course called the Financial Management course is required.


2.  There is a current monthly income requirement. If it is not more than the median income for the State of Minnesota, you can file a Chapter 7. If if is more, there is a complicated "means test" formula which is applied. The best way to figure out if you pass the means test is to arrange for a consultation at my office to go over the test. That means test is way too complicated for me to try and explain it here.  If your income is above the median - as measured by looking at your cash flow for the past six months - and if you can't pass the means test, then your only option would ordinarily be a Chapter 13; and under these circumstances - income above the median - the law requires that the Chapter 13 provide for a five year payment plan.


3.  The court is allowed to convert a Chapter 7 case to a Chapter 13 based on income and other factors. It is possible to file a Chapter 7 and wind up with a Chapter 13 involuntarily.


4.  The homestead exemption is capped at $170,350.00 if the home was acquired within 1,215 days preceding the filing of the bankruptcy. For most of my clients this is not a problem, since they have little or no equity in their home anyway - if they still have a home. If you have lived in your home more than 1,215 days, the full $420,000 homestead exemption provided under Minnesota statutes would apply. People with that much equity in my experience tend to have options which are better than filing a bankruptcy.


5.  Before being given a discharge, be it in Chapter 7 or Chapter 13, another Financial Counseling Course is required. Yes, you have to do this twice. Probably, however, you can do this on line and over the phone - and it will only take a couple of hours. The requirement to take the second course seems very easy to forget, and I have found myself having to send out urgent reminders about it. Not taking the second course by the deadline means the case will be dismissed - in other words, thrown out. The dismissal means that you don't get the debts discharged. In the case of a Chapter 7, my understanding is that this kind of dismissal means the debtors can't file another Chapter 7 case for eight years. That's a pretty serious result for not complying with a seemingly fairly minor requirement.


Where to get the required Credit Counseling

Prior to filing of either a Chapter 7 or a Chapter 13, a certificate of completion of an informational consumer credit counseling program is required. Here is a link to the list of the providers that have been approved for providing this program in Minnesota. Prior to being discharged, another course is required, for which the same agencies have also been approved. They call the second course the "debtor education" course.


The easy way to complete the required programs is either on line or by phone, or a combination of phone and on line. If you want to do the counseling on line and by phone, my favorite resource is the Debt Education and Certification Foundation. Their initial program usually only takes about two hours for most of my clients. If you let me sign you up and get you a user name and password, the cost is $25 per course. First you answer questions and fill out information on their web site, and then you chat with them by phone.

Minnesota bankruptcy lawyer office across from Ridgedale

Kelly Law Office
11900 Wayzata Blvd. #116E
Minnetonka, MN 55305
Phone: 952-544-6356
Fax: 952-525-7924

Across I-394 from Ridgedale. Serving the entire Minneapolis and St. Paul area, with easy access from the western suburbs including Minnetonka, St. Louis Park, Golden Valley, Hopkins, Eden Prairie, Maple Grove, St. Michael, Waconia, Medina and Plymouth. Also available by appointment only at 8421 Wayzata Blvd., second floor conference room, St. Louis Park, MN 55426.



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