A recent press release from the National Consumer Law Center highlights a new federal rule that, if not modified in the next two months, will take effect May 1st and should better protect the bank accounts of people receiving government benefits. Here’s what you need to know.

When Creditors Can’t Garnish Your Money

If you’ve ever filed for bankruptcy or been in serious debt, you may be familiar with the practice of garnishment, which occurs when a creditor collects money directly from your wages or bank account to cover a debt you owe.

• Current law protects certain funds: As federal laws now stand, creditors are prohibited from garnishing certain payments from the accounts of debtors (that is, people who owe them money). These funds include Social Security payments, disability payments, veterans’ benefits and other benefits for low-income and disabled people.
• Current practice permits the garnishment: Despite the prohibition against garnishing such funds from bank accounts, it seems that many banks regularly freeze the accounts of customers whose creditors request a garnishment from the bank. While customers can have these funds unfrozen, doing so generally requires hiring a lawyer and can take time. During that time, these customers may not have access to the funds in their account that they need to make basic purchases.
• High monthly toll on the poor: Reports note that every month, as many as 100,000 Americans are victimized by this improper garnishment.
• Immediate action is essential: A recent New York Times Op-Ed piece notes that if customers do not act quickly enough to unfreeze their accounts, creditors may end up garnishing the funds regardless of the federal laws prohibiting such action.
• “Uncertainty of origins of funds”: Apparently, banks have justified their freezing of accounts legally protected from garnishment by claiming that they have no way of tracking the origins of funds in any given account, and that if they were to ignore orders of garnishment, they could face legal repercussions.

The New Rule: Electronic Tags for Special Funds

The new rule, then (if it is not modified or struck down before May 1), will allow the government to electronically mark the money it deposits into beneficiaries’ bank accounts. With such tags in place, banks should be able to easily identify which funds are eligible for garnishment and which funds are protected.

The National Consumer Law Center noted in a press release that the new rule is especially good news for retirees, veterans and Americans with disabilities, as their accounts tend to most often be the ones with the types of money in question.

Stay posted to the Total Bankruptcy blog to find out the latest updates and changes to this rule as the public comment period comes to a close.

A bill recently signed into law in New York outlines more extensive exemptions for petitioners filing under Chapter 7 of the U.S. Bankruptcy Code. The new law, according to Bloomberg news, has been lauded by consumer advocates and grumbled about by bankers and some city officials.

So what’s the big deal about changing Chapter 7 bankruptcy exemptions? A lot, if you’re interested in keeping your valuables when you enter bankruptcy protection.

How Chapter 7 Exemptions Work

To understand the significance of the New York law, it’s essential to understand how exemptions work in Chapter 7 bankruptcy. Here’s an outline.

• Laws by state: Each state outlines its own exemptions and is responsible for updating those exemptions as values and costs fluctuate.
• Protected property: Exemptions outline property that is protected from the Chapter 7 liquidation sale. Any property that is not protected by an exemption might be sold by a filer’s bankruptcy trustee to raise money to repay the filer’s creditors. However, in most cases there is no sale of any property thanks to the protection of exemptions.

Changes to New York Chapter 7 Exemptions

So what will change about the Empire State’s Chapter 7 exemptions? According to sources, a few things, including the following:

• Increased homestead exemption: It seems that New York’s homestead exemption will increase from $50,000 to up to $150,000, a move, some proponents think, that will allow more filers to keep their homes in Chapter 7 bankruptcy. Other advocates reportedly suggest that the increased dollar amount is more in line with current property values in the state.
• Increased vehicle exemption: Additionally, Chapter 7 filers will apparently be able to hold onto vehicles worth up to $4,000 above an associated loan (an increase from the earlier limit of $2,400 above). This exemption may make it easier to protect your car from repossession or towing if you have have traffic ticket debt.

Some analysts have reportedly suggested that the new changes to Chapter 7 exemptions in New York might make loans harder to come by in the state, as less money will be available for liquidation and creditor repayment in Chapter 7 bankruptcy filings. But for Chapter 7 petitioners in New York, the changes should be welcome.

Wondering about your state’s latest Chapter 7 exemption updates? For more information about the current state of Chapter 7 bankruptcy where you live, you can speak with a bankruptcy lawyer in your area.

Chapter 7 bankruptcy is an option for debtors who simply cannot pay off their creditors due to any number of circumstances: divorce, job loss, or high medical bills. The common view of people who file for bankruptcy is that they must be deadbeats or living beyond their means, but it's normal people who file for bankruptcy.

Perhaps you qualify for Chapter 7 bankruptcy. You may be wondering if you’ll lose everything in the process. The good news is that some property is exempt from bankruptcy proceedings. There are two lists of possible exemptions: one state, one federal. Most states allow debtors to utilize only state exemptions, but a few states allow the debtor to choose between federal or state exemptions. An attorney may be able to assist you in determining what property your state exempts.

Homestead Exemption

The first, and most common, exemption is known as the “homestead exemption,” and it applies to your residence. The limitations on value of the homestead vary from state to state. For instance, in Texas there is no limit on the value of the homestead. In contrast, the maximum value that can be claimed in Alabama is $5,000.

Some states require special proceedings for spouses who jointly own property. You may also be required to continue making mortgage payments in order to keep the house. Once again, an attorney may be able to help you decide if those requirements apply in your state.

Vehicle Exemption

The second most common exemption is the vehicle exemption. Most people will not lose their car, provided its value in equity is below the state exemptions requirement. This value is usually around $3,000, but you need to check your state’s requirements.

In order to calculate the equity of your vehicle, find the market value of the vehicle and then subtract any money owed on it. If the vehicle is worth less than the exemption vehicle, you will probably be permitted to exempt your vehicle from the bankruptcy proceedings. If the vehicle is worth more than the exemption value, it is possible to pay the bankruptcy trustee the amount above the exemption value in order to keep the vehicle.

Like the homestead exemption, if you retain your vehicle, you are required to continue paying any loans or leases on the vehicle.

Other Exemptions

Other exempted property includes household property and appliances, clothing, jewelry up to a certain value, life insurance, alimony and child support, public benefits, retirement plans, and tools that are necessary for the debtor’s trade. For example, a professional musician will not lose her harp in bankruptcy proceedings, even if it is a very expensive musical instrument.

Unexempted property may include stamps, coins, and other collections; cash; bank accounts; stocks, bonds, and other investments; a second vehicle; or a second or vacation home. It is possible to keep a second vehicle, however, if it qualifies under another exemption category, for instance "tools of the trade." For example, if the debtor owns a carpet cleaning business, and needs his company’s van in order to continue doing business. This varies between states as well.

When filing for bankruptcy, the debtor will file a schedule, or list, of all exempted property, including its description, market value, and exemption value. This will allow other parties in your proceedings to review your exemptions and object. However, even if a creditor believes an exemption to be improperly claimed, they have the burden of proof—they can't simply demand you hand over assets.

Bankruptcy can provide relief from a wide array of debts, and despite common myths, very few debtors are left with nothing after they file. Most of all, bankruptcy gives you the chance to move on from debts and start anew.

For more information on bankruptcy exemptions, check out the state bankruptcy laws or talk with a local bankruptcy lawyer today.

Student loans have become infamous for rarely being discharged in bankruptcy. However, before 2005, only government-backed student loans were protected—private student loans could be forgiven in bankruptcy.

The Chicago Defender reported that several U.S. lawmakers have proposed a piece of legislation that would allow bankruptcy courts to once again discharge student loans issued by private lenders.

The legislation, which is still in its earliest stages, would address what its sponsors (including Rep. Danny K. Davis, Sen. Sheldon Whitehouse, Sen. Dick Durbin, Rep. Steve Cohen and Sen. Al Franken) see as an unrealistic burden of debt many students have upon graduation.

Indeed, the statistics cited by the Defender and a press release from Senator Durbin’s office are eye opening:

• Until the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect in 2005, private student loans were treated like other loans in bankruptcy; now, they can only be discharged if a filer can show "undue hardship."
• Congress recently ended a $6 billion subsidy to private student lenders, thus eliminating one advantage they had over other lenders. This student lending reform was signed into law as part of the health care reform legislation. The sponsoring legislators argue that the restoration of dischargeability will further level the playing fields.
• Private student loans have increased in both popularity and cost in recent years, some coming with interest rates at and above 15 percent.

If the new bill becomes law, its sponsors contend, it will give students wishing to pursue higher education a certain peace of mind, as they will have the option of discharging the associated debts should they encounter unexpected financial hardship.

The Current Law

As it stands now, BAPCPA permits individuals who file for Chapter 7 bankruptcy protection to receive a full discharge of many unsecured debts (that is, filers are excused from paying these debts); however, some debts cannot be discharged in a Chapter 7 filing. These include:

• Spousal support (alimony)
• Child support
• Student loans
• Most tax debt

Supporters of the new bill apparently believe that student loans don't fall under the same category as the other non-dischargeable debts, as they do not contribute directly to someone's wellbeing.

But the bill will likely have obstacles to overcome in Congress. Opponents are likely to point out that making private student loans dischargeable in bankruptcy decreases lenders' security when issuing these loans and could lead to increased interest rates and fees to compensate for potential lost income.

Additional Resources

Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) (PDF)

Bankruptcy filings among American individuals and businesses rose to record levels in March of this year, according to a report by Reuters. Here’s a look at the numbers and what they mean for bankruptcy in the U.S.

• 158,141 bankruptcy petitions were filed in the U.S. during March, 2010, according to numbers released by Automated Access to Court Electronic Records (AACER).
• This number represents a 35 percent increase from February, 2010, and a 20 percent increase from March, 2009.
• Prior to March, the most filings during a single month since the implementation of the new bankruptcy law in 2005 occurred in October 2009, when 133,393 cases were filed.
• Of the total cases filed, 149,979 bankruptcy petitions were from individuals and 8,162 petitions were from businesses.
• Nearly three-quarters of all petitions filed were under Chapter 7 of the U.S. Bankruptcy code; the remainder were mostly Chapter 13 cases, with a few Chapter 11 cases as well.

These numbers are significant for a number of reasons.

BAPCPA and Filing for Bankruptcy

The nation’s bankruptcy laws were overhauled in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Because the law was expected to make bankruptcy protection more difficult to get, filings soared just before the law passed as people sought protection under the old law.

In 2005, a record year for bankruptcy filings, 2.08 million cases were filed, with both individuals and businesses filing at higher rates than usual.

After the late-2005 rush to file, there was a lull, but in the years following, filings have increased steadily. Last year, 1.47 million bankruptcy cases were filed in the States, the highest since the law’s passage, and March’s numbers suggest that this year could have an even higher number.

Morals of the Story

The lessons here are important:

• You’re not alone: Many people delay filing for bankruptcy because of the stigma associated with it. These figures clearly show that significant numbers of Americans are struggling with debt.
• Bankruptcy isn’t out of reach: Many people feared that, with the BAPCPA laws in place, qualifying for bankruptcy protection would be almost impossible. Again, millions of Americans have been helped since the new law took effect, showing that much of the fear was unfounded.

Additional Resources

Bankruptcy Abuse Prevention and Consumer Protection Act (PDF)

For many people considering filing for bankruptcy, it’s important to know whether they’ll be able to get on with their lives afterward—and for many, that will be determined by whether or not they have a car.

And, with car issues in the news pretty often these days, they’re certainly on our minds. Here’s a little crash course on what you can expect to happen to your car if you file for bankruptcy.

Chapter 7 & Chapter 13 Bankruptcy

Whether you file under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code, you can expect an automatic stay to take effect. This stay prevents debt collection, wage garnishment, lawsuits related to your finances, foreclosure and repossession.

The automatic stay remains effective until the court discharges your case.

Cars in Chapter 7 Bankruptcy

Chapter 7 bankruptcy offers filers a complete discharge of many unsecured debts. Your car loan, though, is a secured debt (it’s attached to property—your car). If you file a Chapter 7 case, you’ll have three options for your car loan:

• Redeem: This option involves one lump sum payment to your creditor for the car’s current fair market value. If you can afford to do this, it may make life easier in the future, since you’ll have eliminated car payments. But because most people file for bankruptcy at a time when cash is not handy, it may not be a viable option for many filers.
• Reaffirm: This option allows you to essentially continue making payments on your lease or loan as you did before you filed for bankruptcy. In reaffirming your debt, you agree a second time to continue making payments according to a schedule agreed upon by both you and your creditor.
• Surrender: If neither continuing payments nor redeeming the car will work for you financially (for example, if you owe more on the car than it’s currently worth), you can also choose to surrender your vehicle to your creditor and have the remainder of your debt discharged.

Cars in Chapter 13 Bankruptcy

If you file under Chapter 13 bankruptcy, your car’s future will depend on when you bought it.

• Newer cars: If you bought your car within 910 days of your bankruptcy filing, you’re required to pay the full value of the car loan, though your interest rate may be reduced.
• Older cars: If you purchased your car more than 910 days before filing for bankruptcy, you’re only required to repay the car’s current fair market value.

Additional Resources

Understanding Vehicle Financing (PDF)

Understanding Vehicle Repossession (PDF)

A recent ruling by an Idaho bankruptcy judge, reported by the Des Moines Register, could mean bad news for parents with 529 tax-advantaged college savings plans for their children who file for bankruptcy.

The Ruling

The case in question apparently involved a couple who had put $14,500 into a 529 college savings account for their daughter. The girl’s grandmother reportedly contributed an additional $40,000. Ideally, the funds would have been used for the daughter’s education expenses (including textbooks, tuition, room, board and fees).

But, in this case, the girl’s parents filed for bankruptcy shortly after putting the money into the 529 account. And the judge overseeing their case ruled that the entire account (with the exception of the state’s $5,475 exemption) would be considered part of their assets and could thus be used to repay creditors.

The ruling landed this way, it seems, because the parents legally controlled the funds, and so could have used them for purposes other than their daughter’s education if they chose.

What It Means for You

So how could the Idaho bankruptcy court's ruling affect potential bankruptcy filers? If you or your relatives want to establish a 529 account for a child’s education, consider taking the following precautions:

• Invest early: Contributions made 720 days or more before a bankruptcy filing will likely be protected from the court. This provision was put in place to prevent filers from shielding their assets in 529 funds directly before a bankruptcy filing.
• Give up control: If you’re struggling financially but another family member interested in contributing education funds is not, consider keeping the account in that person’s name. That way, if you file for bankruptcy, the money will not be legally yours.

Further, the ruling in Idaho doesn’t necessarily mean that bankruptcy judges across the nation will follow suit in similar situations. While it’s likely that the same logic will be provided to other cases, it’s not guaranteed.

Besides, according to the Register, few people who file for personal bankruptcy have 529 accounts to worry about. But, if someone in your family is thinking about initiating such a fund, be sure to check with a lawyer first to make sure the money will be safe in case of a bankruptcy filing.

Additional Resources

A Guide to Understanding 529 Plans (PDF)

529 Tax Deduction Information (2009) (PDF)