The United States Supreme Court Makes Bankruptcy Easier!

by Jim Ince

You have likely heard quite a lot about the fact that the new bankruptcy laws have made it much more difficult to file for bankruptcy. In reality, most of what you have heard is a myth. There has always been a disconnect between what Congress meant to do and what they actually managed to do.

The various things that people say about the “new” bankruptcy law, which ironically is more than five years old now, is either that it prevents people from filing for bankruptcy or it makes it so that everyone has to file for a Chapter 13 bankruptcy and pay back all of their debts. Nothing could be further from the truth. The law has actually caused an increase in the number of bankruptcy filings and an increase in Chapter 7 filings. The problem is that the law was based on faulty presumptions. Legislators assumed that bankruptcy attorneys were putting people who had lots of extra money and just did not want to pay their creditors into bankruptcy. The truth is that people only file for bankruptcy when they are really hurting and even then, most do it reluctantly.

The courts and the bankruptcy attorneys had used common sense in deciding who should be allowed to file a Chapter 7 case and who should be allowed to file a Chapter 13 case. The system worked quite well. When Congress passed the new law, however, it put together a very strict mathematical test. The most amazing thing is that Congress made the test far more lenient than the former practices used by the attorneys and the courts. So, under the new test that everyone must follow, more people are qualified to file for Chapter 7 bankruptcy.

There was still some question, however, about the flexibility of the new law. What would happen if a debtor’s circumstances changed drastically? For example, an individual filing for bankruptcy must provide six months of pay stubs to determine the last six month’s income. The problem could arise where a person has changed jobs in the last six months or received some unusual one-time payment. A strict reading of the law seemed to indicate that the court could not consider any of those factors when looking at the case. Courts were only to look at the last six months’ income and assume that is how the individual lives now. Luckily, many of the local courts began taking a much more flexible approach and allowing the trustees and attorneys to make adjustments. All of the courts in the district where our clients file have allowed those adjustments. There were courts in the country that took the stricter approach and refused to allow any adjustment.

The United States Supreme Court ruled that the courts that used the common-sense approach were correct. In Hamilton, Chapter 13 Trustee, v. Lanning, 560 U.S., 2010, the Court reasoned that Congress could not have intended the absurd result that would hold an individual to the income they had made in the last six months. As the opinion pointed out, people often will file for bankruptcy at the time when their income has continued to reduce over a period of months. When their income drop becomes critical, that is when people need help the most. The Court realized that Congress only intended to use the last six months’ income as a “first step” and a guideline for which direction courts should go.

So, no, bankruptcy is not more difficult to file. As of the recent Supreme Court opinion, it has gotten even easier. The only way for you to know if you would be a good candidate for bankruptcy is to come in and talk to a qualified bankruptcy attorney at one of our free consultations offered throughout all of our offices in Texas.

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