The new bankruptcy law which goes into effect in October 2005 is the most comprehensive overhaul of the system in over twenty five years. Banks and credit card companies have been seeking these changes, as they suggest that far too many people have been using bankruptcy to escape debts that they are capable of repaying. Opponents claim the law will make bankruptcy too expensive, and will disproportionately burden low and middle income filers.

The acknowledged effect of the new law will be to reduce the number of people filing for bankruptcy, and to push more of the filers into Chapter 13 (where a judge would set up a repayment plan) rather than Chapter 7 (where debts can be wiped out). Following are the key changes that will go into effect:

• A new means test will figure out how much a filer can afford to repay.
• A debtor will be required to complete a credit counseling program at their own expense.
• The homestead exemption will be limited in cases where the filer purchased the residence within three years and four months of filing for bankruptcy.
• Bankruptcy attorneys will now be held liable for any inaccuracies in their clients bankruptcy papers.
• The automatic stay on debt collection efforts will be weakened.

The Means Test

Under previous bankruptcy law, the court would decide which chapter an individual could file for, taking into consideration their finances and personal situation. Under the new law, there is a means test to determine if you can file and under which chapter. The means test is complicated, and if you file incorrectly the court can dismiss your case entirely and charge you and your attorney court costs. In short, if your income is more than your state’s average, and you can pay at least one hundred dollars a month after "reasonable" expenses, you would be ineligible for Chapter 7 and would have to file for a Chapter 13 repayment plan. It’s important to note that in order to figure out what "reasonable" monthly expenses are, the means test uses IRS figures for your state, not your actual expenses. For example, if the IRS has determined that a reasonable rent payment in your state is eight hundred dollars per month, that is the figure that will be used to determine how much you can pay your creditors, even if your actual rent is one thousand dollars per month.

Opponents to the law point out that expenses can vary widely in some states, and many people may be saddled with repayment plans they cannot realistically afford. They also argue that the means test will cut most people’s budgets so close that they will be unable to save any money for the five years they are adhering to the repayment plan.