As of October 17, 2005 it’s going to get a whole lot harder to file bankruptcy in the United States. That’s when the Bankruptcy Abuse Prevention and Consumer Protection Act takes effect, making it far more difficult to file for Chapter 7 bankruptcy, which wipes out your debts and gives you a fresh start. Rather, most bankruptcy-seekers will be forced into filing for Chapter 13 bankruptcy and paying back their creditors. So what’s changing?

First off, the income limits are tightening up. People who exceed their state’s median income in the six months preceding their bankruptcy filing may not be allowed to file under Chapter 7. Rather, if a bankruptcy judge decides that you can pay at least $100/month, you’ll be forced to file under Chapter 13 and repay your creditors following a court-approved payment plan. This could be particularly problematic for consumers that have experienced a recent job loss, death in the family, or disability.

Next up… More credit counseling. From here on out, consumers considering bankruptcy will have to undergo credit counseling within six months before filing and will also have to take a debtor education course before they exit bankruptcy protection. The fees associated with this counseling might be waived for individuals that can prove that they’re unable to pay.

Another change is that fewer debts will be excused for individuals filing under Chapter 7. Even if your income is low enough to avoide being forced into Chapter 13 debt repayment, more debts than ever will have to be paid back. For example, while current laws make it nearly impossible to avoid paying back students loans to the government and non-profit agencies, the new law extends this repayment requirement to banks and other private lenders. Also, if you buy $500 (or more) worth of luxury goods through a single creditor within 90 days of filing bankruptcy, you’ll have to pay it back. Similarly, if you take $700 (or more) in cash advances within 70 days of filing, you’ll have to repay that, as well. And for car loans… Instead of having to pay back the current value of the car, you’ll now have to repay the full amount of the outstanding loan.

And then there’s the cost of filing… Currently, the cost to file Chapter 7 bankruptcy is $209, whereas Chapter 13 bankruptcy runs $194. Once the new law takes effect, the Chapter 7 fee will increase to $274, whereas Chapter 13 will drop a bit to $189. Keep in mind, however, that these fees don’t include the credit counseling and debt management course costs that will be required, nor do they cover the administrative fees that some bankruptcy courts charge. Legal fees (which currently run $1,000ish) will likely rise, as well, due to additional paperwork, income verification, requirements, etc. According to the bankruptcy institute, 57% of their members expect fees to double, whereas 22% envision smaller increases.

All in all, I’d have to say that these sorts of changes have been a long time in coming. That being said, these changes couldn’t come at a worse time for people whose lives have been disrupted by the recent hurricanes along the Gulf Coast.

[Source: Scripps Howard News Service]