Last April, Congress passed the Bankruptcy Abuse and Consumer Protection Act, the most radical reform of our nation’s bankruptcy laws in more than 25 years. Proponents of the bill argue that most consumers who file bankruptcy do so simply because they don’t want to pay their bills. That’s a moot point, as studies show that the majority of bankruptcy filers have suffered illness, injury, or loss of employment. Regardless of the reasons, Congress has made the changes and millions of Americans will be affected when the new law takes effect on October 15.
Here is a short list of the changes and how consumers will be affected.
Goodbye, Chapter 7 – Until now, most consumers have been allowed to file under Chapter 7 of the federal bankruptcy code. Chapter 7 allows the court to eliminate most consumer debts, allowing the debtor to start over. The new law establishes a “resource test.” Anyone with income that exceeds their state median income will have to apply under the stricter Chapter 13, which requires a payment schedule of up to five years.
Attorney Issues – More complicated Chapter 13 filings will make it necessary for filers to hire an attorney. Most bankruptcy attorneys are already reporting a dramatic increase in business; some even turn customers away. If you need a lawyer, hire one now as they will be very busy soon.
More issues with attorneys: The law also leaves attorneys legally responsible for the accuracy of information submitted on behalf of their clients. This has led most attorneys to increase their fees. Some, including those who do bankruptcy work for free or pro bono, have decided to give up bankruptcy work entirely. In short, it will soon be more difficult and more expensive to hire an attorney.
Mandatory Credit Counseling: Congress has required debtors to obtain credit counseling from an approved agency within six months of filing for bankruptcy. As of now, this requirement is largely undefined, with rules, regulations, and qualifications for advisers still up in the air.
Expect More Bills – Some obligations, such as student loans or taxes, must be paid in full even after filing for bankruptcy. The new law expands the list of debts that cannot be forgiven.
The new legislation, rightly or wrongly, makes it harder, slower and more expensive for a debtor to file for bankruptcy. Consumers considering doing so should act now, as regulations will soon tighten. Bankruptcy should always be an option of last resort, but if you cannot avoid it, you must act quickly.