The New Bankruptcy Law

If you have considered filing for bankruptcy, the new bankruptcy law will affect how your debts are handled. The following article outlines the major changes that occurred with this bankruptcy reform act.

Tougher Bankruptcy Laws Take Effect

President Bush's Bankruptcy Abuse Prevention and Consumer Protection Act went into effect on October 17, 2005. This new bankruptcy law makes it more difficult to cancel your debts under Chapter 7 Bankruptcy protection in comparison to previous years. Instead, consumers will find themselves having to file for Chapter 13 Bankruptcy protection and paying back their creditors over a five year period.

Here is a look into some of the major changes that will affect consumers choosing to file for bankruptcy under Bankruptcy Abuse Prevention and Consumer Protection Act.

Qualifying for Bankruptcy: Chapter 7 or Chapter 13?

To be able to qualify for protection under Chapter 7 bankruptcy, consumers will have to face a means test. The means test determines if your household falls above or below the median income in the state where you reside. Those whose total is greater than the state median income will not qualify to cancel debts under Chapter 7 protection and will alternately have to file under Chapter 13 and pay back your creditors.

The major intent of the bankruptcy reform is to require people who can afford to make some payments towards their debt, to make these payments, while still affording them the right to have the rest of their debt erased.

The amount you have to pay back under Chapter 13 protection will be greater because instead of a 3-year pay back period, that time frame is now extended to five years - to ensure your creditors get paid.

Credit Counseling

Anyone filing for bankruptcy will be required to go through mandatory credit counseling. Be careful before choosing a credit counselor as this field is filled with people looking to line their pockets while emptying yours.

To find a trustworthy counselor, check to see if there are any complaints against them or their organization filed with your local Better Business Bureau. Secondly, find out if they are certified by the National Foundation of Credit Counselors or the Association of Independent Consumer Credit Counseling Agencies. Finally, find out if they have not-for-profit status. Personally, I recommend Consumer Credit Counseling Services as they meet all three of the above criteria. They can be reached at 1-800-888-2227 and can connect you with a local office.

The Cost Factor

Filing for Chapter 7 protection under the old laws normally cost under $1,000. Under the new laws, filing fees have been increased by $60. Additionally, your attorney will be required to double check all your financial information which will take more of his or her time. Also there is greater liability imposed on the lawyer which may cause their liability insurance to increase, which gets passed on to their clients in the form of higher fees.

Why Were the Laws Changed?

The bottom line is that major commercial creditors lobbied hard for reform. Companies like CitiBank, MBNA, and other credit card issuers actively contributed proposed amendments along with generous financial support to reforming the bankruptcy laws - and in their favor, according to many consumer protection groups.


About the Author: James Dimmitt is editor of "TO YOUR CREDIT", a free weekly newsletter with ideas to help you manage your personal finances.


If you are considering declaring bankruptcy, it is best to have a qualified lawyer to handle it for you. Read more about how to find a bankruptcy lawyer in your area.

While the new bankruptcy law affects how your debts are handled, you also have the option of getting your finances under control yourself. The following articles can help you discover your options: