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Erasing your debts just got much harder. Two major decisions have recently passed in
Washington that may have a dramatic impact, positive or negative, on the lives of many
Americans. On April 20, 2005 President Bush signed into law the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005. And on April 4th, 2005 the U.S. Supreme court ruled that
under the bankruptcy code, IRA balances were protected from creditors in a bankruptcy. Both
decisions might radically affect your life and require careful consideration, especially if your
profession (ie. Medicine) exposes you to potential litigation. This two part article will expand on
some of the recent changes.

Bankruptcy Act

Backed by powerful credit card industry lobbyists, our "friends" on Capital Hill have been busily at
work protecting credit card companies at the expense of the consumer. The Act, parts of which
are effective immediately and other parts which go into effect on October 17th, 2005, makes it
harder marijuana addiction consumers to erase their unsecured debts and requires debtors to seek credit card
counseling before being able to file (more on this later). Here are some of the highlights.

By way of background, individuals may declare one of two forms of bankruptcy---Chapter 7 or
Chapter 13.Under Chapter 7, individual is permitted to keep certain assets, but all others are relinquished to satisfy cost of bankruptcy and creditor claims. Most debts are discharged completely and debtor is no longer responsible for repayment. Child support, alimony and education loans cannot be discharged and the debtor cannot file again for eight years (bumped up from six years).

Under Chapter 13 bankruptcy, a plan is created under which the debtor will repay outstanding
debts within specified time. Usually the amount owed is reduced by the judge so that payments
remain manageable and debtor is generally not obligated to relinquish any assets.

Means Testing

The most important factor of the law has to do with the "means test" that bankruptcy filers would
be subjected to in order to determine if they qualify for Chapter 7 or Chapter 13. There are two
facets of the test that are conducted: the median income test and the means test.

The (personal income) means test is based largely on median state incomes. So if the combined
gross household income is greater than the median income in your state, the law prevents your
from filing Chapter 7 (completely eliminating your debt) and may force you to file a Chapter 13
plan. So, for example a Florida physician supporting this family would be subjected to a state
median of only $58,605. If the combined income in the physician's household is more than the
state's median income threshold (and, of course it is), Eenbhmkltlpvzb you do have to apply the Mean's Test,
and to do so you need to calculate Monthly Expenses. To find out what the state median income
levels are, click here.

The second test checks to see if the debtor's current monthly income (reduced by allowed
expenses) exceeds compare auto insurance quotes amount allowed under the Act for a family of the same size. The means
test is basically an "excess income" test used to determine what money is left over after deducting
reasonable expenses that can be used to pay unsecured creditors.

Included within the calculation of debtor's monthly expenses are: 1) reasonably necessary
expenses incurred to maintain the safety of the debtor and the debtor's family (see link below); 2)
continuation of actual expenses paid by the debtor for the care and support of an elderly,
chronically ill, or disabled household or nondependent immediate family member; and 3) an
additional allowance for housing and utilities based upon documented home energy expenses.

Individuals may use the "National Standards for Allowable Living Expenses" charts available on
the IRS website to determine the standards for food, clothing and other items. The chart is based
on the individuals gross monthly income.

If a Debtor's income meets or exceeds the mean's test, then any Ch 13 Plan must have duration
for at least five years unless the plan provides that all allowed unsecured claims are to be paid in
full over a shorter term.

Credit Counseling

The other critical (and controversial) matter is the mandatory requirement that debtors go through
credit counseling in order to qualify for bankruptcy, and counseling must start at least 180 days
before filing for federal bankruptcy protection. This particular portion of the Act is quite
disturbing, given that the credit counseling industry is not only unregulated, but in fact is beset
with unimaginable fraud and abuse by "bad players". . There are too many counseling agencies
out there posing as non-profits that get away with grossly overcharging clients for services,
implementing absurd monthly fees, and do little to negotiate with the credit card companies to
reduce rates and/or debt. Credit counseling agencies are supposed to help consumers out of
debt; many in fact, make the problems worse. Basically, Congress just paved the way for
unknowing consumers to be thrown into the lion's den in an already corrupt system. Their
mission, I'm sure, was accomplished as soon as they secured sizable contributions from credit
card companies in exchange for this law.

Homestead Protection

The Act also modified some of the protections offered by the previous Homestead Exception
(which is already in effect).

Any addition to the value of a homestead that is funded by nonexempt property, and made with
the intent to hinder, delay, or defraud creditors, is not protected by the state homestead
exemption if it was made during the ten year period before a debtor filed for bankruptcy.

Any homestead property purchased within three years and four months (or 1,215 days) of a filing
date is only exempt up to $125,000. The exception to the rule, however, is if the debtor already
lived in the same state and merely transferred his/her interest from a previous principal residence.

There is a $125,000 cap on the homestead exemption for any debtor convicted of a felony which
demonstrates bankruptcy abuse, or if the debtor owes a debt arising from violation of Federal or
State securities laws, criminal act, intentional tort, or willful or reckless misconduct that caused
serious physical injury or death to another individual during the last five years.

Fraudulent Transfers

Fraudulent transfers are asset transfers that are made with the intent to defraud a creditor (or
potential creditor). It is not a criminal activity, but the transaction may be reversed by a judge and therefore make the assets accessible to your creditor

The look back period in which certain transfers are deemed to be fraudulent and recoverable
under the Bankruptcy Code was increased from one to two years. However, state fraudulent
conveyance laws often allow the bankruptcy trustee to go back even further. The two year period
applies only to cases filed twelve months or more after enactment of the Act.

Part two of my article in the next newsletter will specifically discuss the impact that the 2005
Bankruptcy Act and the Supreme Court decision will have on IRA's and other retirement plans.

Cathy Pareto, CFP, AIF, MBA

Cathy Pareto and Associates, Inc.
www.cathypareto.com">www.cathypareto.com

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