Congress changed the bankruptcy laws in 2005 about six months after George W. Bush signed them into law. For all bankruptcies filed after October 17, 2005, every debtor has to complete a Means Test analysis to determine what their “disposable income” is on a monthly basis to repay back to their unsecured creditors over a 60 month time period in a Chapter 13 bankruptcy.
However, if there is no disposable income then the debtor can file a Chapter 7 or a Chapter 13 bankruptcy and discharge all of the unsecured non-priority debt. In a Chapter 13 bankruptcy, post 2005, if the vehicle was last financed over 30 months prior to the petition then the debtor can pay the value of the vehicle through the Plan rather than the amount owed if the car is underwater. That typically results in a substantial savings for the debt troubled individual or family.
However, the Bankruptcy Court cannot modify the terms and conditions of a mortgage loan. Nevertheless, if the family is behind on the house, then a Chapter 13 bankruptcy can buy the debtor 5 years to catch up on the arrears and avoid foreclosure.