Bankruptcy Bureaucracy

Most people file bankruptcy to regain control of their finances. Although the Bankruptcy Abuse Prevention and Consumer Protection Act was signed into law in April 2005, many are still unaware of the changes and their potential impact. To help you decipher the changes, we contacted the Financial Planning Association (

Here are some of the new requirements you ought to know:

Income Tests. According to the CCH Bankruptcy Reform Act Briefing, the means test is designed to “force those debtors who have the ability to pay some of their debts into Chapter 13 as opposed to liquidating under Chapter 7 and wiping the slate clean.” Under the test, a debtor would remain eligible for Chapter 7 if his or her monthly net income is less than $100 ($6,000 over five years). However, if a debtor’s monthly net income exceeds $166.67 ($10,000 over five years), he or she will not be eligible for Chapter 7. Moreover, debtors with monthly net incomes between $6,000 and $9,999 over five years may file Chapter 7 as long as the debtor’s income is less than 25% of all nonpriority, unsecured debts such as credit cards. “You can’t have your debts dismissed anymore if you have a history of high income,” says Michael Kitces, director of financial planning, Pinnacle Advisory Group, Columbia, Maryland.

Tax Returns. Bankruptcy filers must now surrender tax returns, earning projections, and full acknowledgement of assets within both retirement and educational accounts. “For example, if you provide a tax return and the courts see you have received $20,000 in interest from an account, then that means there is a large account that could be used to satisfy your debt,” says Kitces. Previously, filers were only required to give a fairly basic roster of current assets, debts, income, and expenses.

Home Exemptions. Under the old bankruptcy law, the state determined the personal property debtors were allowed to keep with Chapter 7 bankruptcy provided they’d maintained residency for at least three months. Under the new law, you must live in a state for at least two years prior to filing in order to use that state’s exemption laws. Similar rules apply to homestead exemptions, which determine how much home equity you can keep when filing for Chapter 7 bankruptcy. Because exemption amounts vary from state to state, these new residency requirements could make a big difference. You must live in the home for 40 months to receive your state’s homestead exemption. Otherwise, protection for the home is capped at $125,000.

Retirement Assets. Retirement funds, including qualified plans and annuities, IRAs, Roth IRAs, or deferred compensation plans will likely remain tax-exempt in bankruptcy. However, funds in a traditional or Roth IRA (but not SEP plans or SIMPLE IRAs) are exempt only up to $1 million. Potential filers should seek advice from financial, tax, and/or bankruptcy professionals. The American Board of Certification can help you locate a bankruptcy attorney( For more information, contact The American Bankruptcy Institute (