American Bankruptcy Reform Bill Set to Pass the Senate - Changes to Force More Americans to File Canadian Style Proposals

The American Senate is expected to pass the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S.256) within the next two weeks, and President Bush is expected to sign the bill, which represents the most significant changes to the American bankruptcy process in over 25 years.

Under this new legislation, all debtors will be subjected to a "means-test" based on income and expense standards devised by the Internal Revenue Service to deal with tax debtors. As an example, if the debtor has $100 per month more in income than the IRS would allow a delinquent taxpayer to keep, they are required to file a 60 month repayment plan under Chapter 11. In the plan the debtor would pay $100 per month for 60 months, or $6,000 to the plan. The creditors would receive the $6,000 over five years, less the costs of administration.

Since debtors will probably pay more under the new American system, it is not surprising that the new legislation is strongly backed by the credit card industry. In the Canadian system, if you are unable to pay your debts, you can choose to file either a bankruptcy or a proposal.

If you file for bankruptcy, each month you report your income to the trustee, and if your net family exceeds the government set limit, you pay a “surplus income” penalty equal to 50% to 75% of the amount you are over the limit.

As a Canadian trustee, I prefer our system to the American model. Debtors pay each month based on their income that month, not based on what their income might have been six months ago.

In our practice at Hoyes Michalos we encourage proposals as a way to deal with debts and avoid bankruptcy, and as a result almost 40% of our insolvency files are proposals, far higher than the national average.

In a proposal, we negotiate a settlement based on the debtor's ability to pay. It's a "win-win" situation. The debtor avoids bankruptcy, is relieved of their debts, and has one manageable monthly payment. The creditors are happy because they receive more than they would have received in a bankruptcy.

Feel free to e-mail me if you would like information on how a proposal can be used to deal with debts and avoid bankruptcy.

Posted by J. Douglas Hoyes, CA, Trustee @ 2:24 PM

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