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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is likely to have less impact on low income Iowans than on other people looking for bankruptcy protection. Low income Iowans are usually far below the threshold income for qualifying for a Chapter 7 or "straight bankruptcy" and will experience few barriers to filing bankruptcy. Here is a summary of the main changes with the new law:

Means Test And Disposable Income

The means test is a way to see who is eligible to file Chapter 7 or "straight bankruptcy." This is different than a Chapter 13 bankruptcy, which involves setting a schedule to repay debts. The test compares the debtor's average monthly income over a six month period to the state's median income for a household of the same size.
In Iowa, the median incomes are:

• $36,518 for one person,
• $48,095 for a two person household,
• $55,933 for three, and
• $64,051 for four.

Iowans who are below these levels are usually able to file for Chapter 7 protection. The bankruptcy process for people whose incomes are over these limits might involve repaying debts if they're unable to pass other parts of the "means test."

Longer Time Between Discharges

Some people may have a problem because there is a longer wait between discharges. The time period between Chapter 7s has been increased to eight years from the prior case filing time of six years.

New Limits On "Household Goods" Lien Avoidance 

The new law limits "household goods" which can be exempt. This means it will be harder for debtors to keep some property free of creditor's liens. It limits electronic equipment to one radio, one TV, one VCR and one personal computer. It excludes jewelry worth more than $500 and motor vehicles.

Tax Returns And Other Documents

Along with the required lists of creditors and assets, liabilities and income, the debtor now must provide additional items:

• a certificate of credit counseling;
• a statement of monthly net income and anticipated increase in income or expenses after filing;
• tax returns for the most recent tax year; and
• 60 days worth of paystubs.

Failure to provide these documents within 45 days of the filing will result in dismissal. The debtor may be required to provide tax returns for the three prior tax years.

Limits On Dischargeability
 
Debts to a single creditor totaling more than $500 for luxury goods incurred within 90 days of filing cannot be discharged. Cash advances of $750 within 70 days cannot be discharged. This means people thinking about bankruptcy should not try to use cash advances to float their budgets.

The old exceptions for marital property settlements have been eliminated. This means debts owed to spouses and former spouses in the course of a separation agreement or divorce decree are NOT dischargeable.

Automatic Stay

When a bankruptcy is filed, lawsuits filed against the debtor are automatically suspended or stayed. There are two new exceptions to the automatic stay pertaining to EVICTIONS:

• The first allows the eviction proceedings (sometimes called forcible entry and detainer actions or FED) to continue where the landlord obtained an order for possession prior to when the tenant filed for bankruptcy; and;
• In limited situations, the landlord can start an eviction based on "endangerment" of the property or the illegal use of drugs.

Two-Year Resident 

Each state has its own rules about what property a person who files bankruptcy gets to keep, or is "exempt." Debtors may be required to use the exemptions of the state where they lived prior to moving to Iowa if they have not lived in Iowa for 730 days prior to filing. They may also be required to use the federal personal property exemptions if they aren't eligible to use state exemptions.

Limits On Homestead Exemption
 
There is a major change to the Iowa homestead exemption. It used to be unlimited. Now there is a limit of $125,000 in equity exempted in a homestead acquired within 1,215 days (three years and four months) of filing if the equity is not transferred from another homestead. 

Debt Counseling 

In the six months before filing, a debtor must get credit counseling from an "approved, non profit budget or credit counseling agency." The agency must be approved by the U.S. Trustee. Free or reduced fees are available for clients who cannot afford the cost of the counseling programs. Debtors must also complete a "financial education" course before they can receive a discharge of their debts.  

The purpose of being able to file bankruptcy is to provide a "fresh start" to the debtor. The goal of financial counseling is to help people in crisis use this fresh start to improve their long term family security. For some people, however, debt counseling alone will not take care of the problem. A sudden loss of income or sudden increase in expenses, such as medical debts, cannot be planned for and is often the reason people file for bankruptcy.

Helping low-income Iowans maintain household income is a priority for Iowa Legal Aid. The Iowa Legal Aid Website at iowalegalaid.org helps provide information to families on resources that may be available to them. For example, some government programs may provide financial assistance to help cover priority needs like food. Other programs may offer services to help families take care of critical needs like health care.