The new bankruptcy reform law: How will consumers be affected?Sherene Costanzobankruptcy, Chapter 13, Chapter 7, credit restoration People can become buried in debt, which is an extremely draining situation for them. It is hard for them to see the light at the end of the tunnel. Often, they feel the easiest way out is to file for bankruptcy. But under a new law, individuals will be less likely to qualify for the bankruptcy option to get out of debt fast. When will the new law take effect? President George W. Bush signed the bankruptcy reform bill on April 20 and the new bankruptcy law is scheduled to take effect on Oct. 17. A provision to homestead exemption, which applies new limits, was effective the day the bill was signed. What is the law's purpose? The purpose of this new reform is to prevent consumers from abusing the bankruptcy laws. Last year in the U.S., more than one million people filed for a Chapter 7 bankruptcy and approximately a half-million filed for Chapter 13 bankruptcy. The objective of bankruptcy reform is to require people to pay a portion of their debt if they can afford to do so, while still affording them the right to have the rest of their debt removed. What is the difference between a Chapter 13 and a Chapter 7 bankruptcy? Under a Chapter 13 bankruptcy, a consumer is required to pay a portion of the debt owed back to their creditors, usually over a period of about five years. Several debts are not included in the payment plan and repayment isnt required. Under a Chapter 7 bankruptcy, a consumer is not required to pay any debts owed back to their creditors. Their assets (less those exempted by their state) are liquidated and given to creditors and many of the remaining debts are cancelled. In many cases, individuals do not have any assets and thus creditors aren't paid anything. The individual basically receives a fresh, clean start, besides their credit rating suffering for a couple of years. How will the new law affect consumers who want to file for bankruptcy? Basically, the new law will make it more difficult for consumers to file for bankruptcy. Under current law, the courts decide if an individual qualifies for a Chapter 7 bankruptcy. New guidelines and procedures for qualification force consumers to take further measures and meet specific standards when considering filing. The goal is for fewer consumers to be able to file for a Chapter 7 bankruptcy, and to steer them towards Chapter 13 bankruptcy, credit counseling or both. Under current law, the court determines what an individual can afford to pay, whereas the new law will require the courts to follow the more stringent IRS regulations on living standards to determine what the individual can afford to pay. What new procedures and guidelines will be used? •An individual who wishes to file for bankruptcy must first complete six months of an approved credit-counseling course. •An individual must qualify to file a Chapter 7 bankruptcy by having an income that is less than the average income in their state. •Reasonable expenses versus income will be calculated using the IRS formulas, which will identify debtors who have the financial capacity to pay some money to their creditors. •There will be more stringent homestead exemptions such as caps on the amount of the exemption allowed, and restrictions concerning date of purchase and/or moving from one state to another. •Liability of the attorney will be increased for inaccuracies found. This may make it more difficult and more expensive for an individual to find an attorney to take their case. •Child support and alimony will be made a first priority. •Up to 15 percent of an individual's income may be given to charity. This could assist those who are on the borderline for filing a Chapter 7, instead of a Chapter 13 bankruptcy. •Six months of an approved financial management course will be required in order to receive a discharge. What other options are available to consumers? Remember, there are alternatives to help individuals with credit management problems. There are several types of credit counseling programs that may be helpful. People may choose to consider credit restoration to help improve their credit score, and educate themselves about credit and paying off debt. A debt repayment program, debt negotiation/settlement or debt consolidation can assist with paying down their debt. Choosing a reputable company is very important. Credit restoration is useful to help improve a borrower's score before applying for home or auto financing and is always an available option. Improvement of the credit score can be seen within as little as 30 days. Many credit restoration companies will also educate consumers on maintaining an excellent credit rating in the future and provide assistance with settling and paying off debt. Loan officers may help their borrowers improve his or her credit rating, by referring them to a credit restoration company. This may lower their interest rates on loans and revolving credit, and lower their payments. It may also lower insurance rates, and keep them from being buried in debt and may prevent them from filing for bankruptcy. You may also be able to close an extra loan you previously could not have due to a low credit score. It seems the government not only wants to make it more difficult to file for a Chapter 7 bankruptcy, but it is also attempting to educate consumers who wish to file. Education is extremely important in maintaining an excellent credit rating and managing finances. Under the old law, individuals were basically let off the hook without learning a lesson. As for those who are planning to file a bankruptcy, the clock is ticking. The more stringent bankruptcy law may prevent them from qualifying, once the law goes into effect on Oct. 17. For those who are buried in debt, now is the time to start planning and taking action, regardless of which route is taken. Sherene Costanzo is vice president of Credit Consultants Inc. She may be reached at (888) 522-7007 or e-mail [email protected].