The new bankruptcy laws that took effect in October of 2005 made it more difficult to wipe out certain types of debt through the bankruptcy process, especially for middle- and upper-income households. But in some respects, they help consumers pay off their debts more quickly, saving on interest payments.
Here are the major changes to the law:
Strict means test
According to the American Bankruptcy Institute, more than 70 percent of Americans who file for bankruptcy do so now under Chapter 7 of the U.S. Bankruptcy Code. Chapter 7 allows individuals to cancel outstanding unsecured debt, such as credit card and medical bills. But under the new law, most households earning more than their state’s median income will have to file under Chapter 13, which requires a plan to pay off at least some of the outstanding debt. The court will apply a strict means test to determine who is eligible to file under Chapter 7. For the first time, individuals filing for bankruptcy will have to document income with pay stubs and tax returns. Creditors will be able to review these items and can challenge any discrepancies in court.
Revised debt payment plans
Individuals filing a debt payment plan under Chapter 13 of the Bankruptcy Code will see changes including:
- The time period required to make payments on pre-existing debt may grow from three years to five for certain above median income debtors. This may mean debtors will have to pay back a greater percentage of what they owe.
- Debtors will have to repay the full amount of loans on cars purchased within the 30 months immediately prior to filing for bankruptcy. In the past, the court could lower those payments and the interest rate.
Mandatory debt counseling
The new law requires debtors to receive credit counseling at their own expense six months before filing. The goal is to encourage consumers to pay back debts rather than simply walk away. The new law also requires consumers to take a financial-management course after filing for bankruptcy. For information on choosing a credit counselor, visit the Web site of the Federal Trade Commission.
Under the NEW law, you can do almost everything you could do under the old law.
