The Bankruptcy Abuse Prevention and Consumer Protection Act, which was signed into law by President Bush, will go into effect in just a few weeks. In short, the new law, which goes into effect on October 17, 2005, makes it harder to get rid of your debts by filing for Chapter 7 bankruptcy. Instead, consumers will have to file for Chapter 13 bankruptcy and pay back their creditors over the course of five years.
After the new law goes into effect, here are some of the biggest changes that will affect people who choose to file for bankruptcy:
Chapter 7 or Chapter 13: Which is for Qualifying?
A means test will be required for people to get protection under Chapter 7 bankruptcy. The means test figures out if your family's income is above or below the state's median income. If your total debts are more than the state's median income, you won't be able to get rid of your debts under Chapter 7. Instead, you'll have to file for Chapter 13 and pay back your creditors.
The main goal of bankruptcy reform is to make sure that people who can pay some of their debts do so, while still giving them the right to get rid of the rest of their debts.
Under Chapter 13, the amount you have to pay back will be higher because the time you have to pay it back has gone from 3 years to 5 years. This is to make sure that your creditors get paid.
Counseling for credit
Under the new law, anyone who files for bankruptcy will have to go through credit counselling. Be careful when choosing a credit counsellor, because this is a field full of people who want to make money by taking your money.
Check with your local Better Business Bureau to see if any complaints have been made about a counsellor or their organisation. Second, find out if they are certified by the National Foundation of Credit Counselors or the Association of Independent Consumer Credit Counseling Agencies. Lastly, find out if they are a non-profit organisation. Consumer Credit Counseling Services is the one I would recommend because they meet all three of the above requirements. Calling 1-800-888-2227 will put you in touch with a local office.
How Much It Costs
When the old laws were in place, it usually cost less than $1,000 to file for Chapter 7 protection. With the new laws, you can expect to pay more because the fees to file have gone up by $60. Also, your lawyer will have to double-check all the information about your finances, which will take up more of his or her time. Also, the lawyer takes on more responsibility, which may cause their liability insurance to go up. This means that their clients have to pay more in fees. Many people think that fees will go up by between 25 and 50 percent because of the new law.
Why Did the Laws Have to Change?
In the end, reform was pushed hard by large commercial creditors. Many consumer protection groups say that companies like CitiBank, MBNA, and other credit card issuers actively contributed proposed changes and large amounts of money to reforming the bankruptcy laws in their favour.
