Changes to Bankruptcy Law
Important changes to both the Federal Bankruptcy Code and the South Carolina Code of Laws change the way bankruptcy works in South Carolina. Below is a brief overview of the Federal reforms of 2005 and the new South Carolina laws most likely to effect your case.
The Federal reforms of 2005 brought many changes, and a great deal of hype about how “difficult” it was going to be to file for bankruptcy under the new laws. As it turns out, most of the difficulties were overstated, and, the reforms of 2005 are not that bad after all.
For example, the Reforms of 2005 established a nationwide credit counseling program administered by various non-profit organizations. Each person who files for bankruptcy now receives a credit counseling session which usually requires you to spend about 30 minutes online followed by a fifteen minute telephone consultation with a trained counselor. The cost is typically $30. Your counselor will e-mail your certificate to us, and we will forward it to the court when we file your bankruptcy petition.
The Federal reforms encourage the various non-profit organizations to waive the $30 fee in cases of hardship. Similarly, the federal legislation allows the court to waive the $299 filing fee for those who cannot afford to pay.
One of the most celebrated features of the reforms of 2005 is what is the “Means Test”. This is a mathematical test that analyzes a person’s income and expenses to help determine whether a person is eligible for a relatively quick discharge of debts through Chapter 7. If someone is not eligible for Chapter 7 it is generally because they earn too much money and would therefore need to repay a portion of their debts by making monthly payments to a Chapter 13 trustee. Read more below...
Changes to Bankruptcy Law
Federal Reforms of 2005The means test should be thought of as a screening tool that provides a starting point for determining whether a person should file under chapter 7 versus chapter 13. Fortunately, the judges have discretion to allow someone to file under chapter 7 even though the means test suggests they should file under chapter 13. Many people who think they will not qualify under chapter 7 are surprised to learn they actually do qualify and can have their debts discharged relatively quickly.
Finally, a word for you businessmen and women: The means test does not apply if most of your debt is business related. In other words, if most of your debt is from business expenses placed on credit cards or personal guarantees of business debts, then the means test is irrelevant – no matter how high your income. Congress does not want to discourage entrepreneurial risk-taking and therefore does not subject people with primarily business debts to the means test.
Now let’s turn to the truly good news: South Carolina passed laws in 2007 and 2008 to make it easier to file bankruptcy in South Carolina. These laws were enacted in response to the perceived harshness of the federal reforms of 2005. You have to have lived in South Carolina for a full two years if you want to take advantage of South Carolina’s generous exemptions laws. If you have lived in South Carolina for less than two year you can still file bankruptcy here but your property will be protected by the laws of the state that you were living in two years prior to filing. A discussion of the new South Carolina exemption laws follows.
The New Debtor-Friendly South Carolina Exemption LawsYou may have heard stories of someone who lost their car or house in a Chapter 7 bankruptcy. Usually what happened is that the creditor got the house or car back because the person filing chapter 7 was not able to make the payments.
Occasionally, however, the chapter 7 trustee can take certain property. This happens relatively infrequently in South Carolina - perhaps one case in twenty. Usually the asset is a tax refund or mutual fund not hold in a 401(k) or IRA account.
Most people who file bankruptcy in South Carolina are able to keep their homes and cars (and other property) so long as they can continue to make the payments. The reason it is relatively rare for a chapter 7 trustee to take someone’s property in South Carolina is that South Carolina has laws, known as “exemption laws”, that protect a person’s property from the reach of the chapter 7 trustee.
Prior to 2007 and 2008, the exemption laws in South Carolina were woefully inadequate and left little or no protection for many assets. Now, however, the South Carolina exemption laws allow persons to keep much more of their property while going through chapter 7 bankruptcy.
A few quick examples should make things clear. Assume John and Mary are married and file a chapter 7 case together. Their house is worth $200,000, the deed is in both names, and the mortgage payoff is $100,000. Even though they have $100,000 of equity in the house, the trustee cannot take it from them so long as they live in the house and have lived in South Carolina for the last two years. South Carolina’s new homestead exemption protects $107,000 of the home equity ($53,350 each person). If they can continue paying the mortgage they can keep the house. Before the law changed only $20,000 of the home equity was protected.
Let’s assume that John owns a truck free and clear with a trade in value of $5,000. Mary drives a $20,000 car and owes the car finance company $15,000. In other words, each person has $5,000 of equity in their car. John and Mary can keep both vehicles in a chapter 7 because South Carolina’s new exemption laws protect just over $5,000 in automobiles equity. Mary will have to continue to pay the car note, of course, but the trustee can’t touch either car. Before the law changed only $$1,200 of car equity was protected.
Similar exemptions exist for household goods (up to $10,000 in value based on flea market value), tools of the trade, retirement accounts (fully exempt), and most every other class of asset.
Suppose, however, that the same couple also owns a boat worth $10,000 and a piece of investment real estate also worth $10,000. Both the boat and the land are titled in both names are free and clear of liens. Until recently, boats, investment property and many other types of property were completely unprotected by any South Carolina exemption and therefore could be taken by a chapter 7 trustee. In 2008, the South Carolina state legislature created a “wildcard exemption” that can be applied to protect up to $10,700 ($5,350 each person) in any asset you chose. In the example above, the John and Mary could keep the boat and offer the investment property to the chapter 7 trustee who would sell it unless he deemed selling it more trouble than it is worth. Alternatively, they could apply the wildcard exemption to protect the land and offer the boat to the chapter 7 trustee.
One final word… Exemption laws and the rules for qualifying for chapter 7 versus chapter 13 are complicated and have been simplified for our purpose here. The exemption laws will not apply to you if you have not lived in South Carolina for the last two years. All decisions should be taken after consultation with an experienced bankruptcy attorney.