Credit cards, car loans, mortgages, income taxes, medical bills -- sometimes it may seem that accumulating mountains of debt is the only way to get by in today’s economically complicated world. With interest rates rising and finance charges skyrocketing, these seemingly necessary expenses end up costing Americans more than they bargained for. For decades, when people have found themselves buried in personal debt, bankruptcy has been the only way out. In fact, in 2004 over 1.5 million people filed for personal bankruptcy in attempts to find some relief or even wipe their slates clean and make a fresh financial start.
But as of October 17, 2005 hundreds of thousands of consumers will have to find new ways to handle their financial troubles. On that date a new slate of laws go into effect which will create a legal obstacle course for people looking to solve credit problems in the courts.
The new program is called The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005--sounds like a good thing, right? What responsible citizen doesn’t want to stop abuse and protect consumers? Most consumers consider bankruptcy only as a last resort, a safety net guard against financial catastrophe. But the Act will impose new standards for bankruptcy protection which many will find difficult to meet, and might deny these citizens the help they need. If bankruptcy is an option you are considering, prepare yourself for closer scrutiny and harsher bureaucracy than you might have imagined.
New Challenges to Filing for Bankruptcy
First and foremost, the Bankruptcy Act requires debtors to seek credit counseling before filing for bankruptcy, and verifiable evidence of that counseling will be required before your case will be heard (see below). This new provision in effect forces consumers to seek out all alternatives to debt reduction before filing for bankruptcy. Then, money management training (paid for by the filer) is required before any debt can be discharged
Chapter 7 or Chapter 13?
Traditionally, consumers have had the option of filing for bankruptcy under Chapter 7, which eliminates consumer debt entirely, or under Chapter 13, which provides some relief but requires good faith payments on unsecured debt for a period of three years. The new Act examines an individual’s monthly cash flow; if you earn above your state’s median income and your living expenses leave you with at least $100 per month left over to pay towards debt, your options are limited to the more stringent demands of Chapter 13. Furthermore, the Chapter 13 repayment period has been extended from three to five years. Chapter 13 will also make it harder for a filer to retain recently acquired high value property (two-and-a-half years for automobiles, one year for other significant purchases). Previously, an individual could retain ownership of these goods if he or she was able to pay a sum equal to the resell value at the time of the bankruptcy claim. Under the new law, the consumer will be required to pay the full value of the purchase in order to avoid forfeit.
State of Residence
Regulations for claiming bankruptcy vary from state to state, and some states make it considerably easier to file bankruptcy than others. In fact, several states have laws more forgiving than the existing federal provisions. The new program will impose a bankruptcy waiting period, requiring two-years’ residency in any given state before filing for bankruptcy. This is intended to keep people of jumping ship--that is, moving to states with favorable laws and immediately filing for bankruptcy. If you do try to file within two years of an interstate move, you’ll be subject to the tougher laws of the two.
Net Worth and Collateral Value
Bankruptcy has always required a statement of the value of collateral property--all of your personal belongings including your car, clothing, furniture, electronic equipment, etc. However, a lowball estimate used to be an acceptable declaration. Now, consumers will need to determine the actual replacement costs of their durable goods, a number which will need to be certified by an attorney. This number can bump up the individual’s net worth and increase the amount of debt for which the filer is ultimately responsible.
Red Tape: Paperwork and Cost
The new Bankruptcy Act will require much more documentation from the filer than ever before. The court will now require income and expense statements, asset and liability statements, proof of prior credit counseling, pays stubs and current and historic tax returns. If any of these forms are missing from your record, your case can be kicked out of court at the judge’s discretion. And if this bureaucracy isn’t easy, it ain’t cheap either. Experts estimate that average consumer will require up to twice as much time from their bankruptcy attorney--that’s right, doubling the legal fee. But don’t be tempted to forgo the legal advice and undertake the process by yourself; if your case is dismissed because of error on your part, a second filing can result in a judgment with harsher, more expensive terms, or even put your collateral, such as your home, in jeopardy. The burden upon the attorney becomes much heavier as well, as the court will now hold the attorney personally liable for the accuracy of the filer’s claim. This burden is likely to increase even further the fees which attorneys will charge before willingly undertaking bankruptcy cases.
External Links:
White House Press Release - President Bush on The Bankruptcy Abuse Prevention and Consumer Protection Act