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
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
•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
•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
•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
•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
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
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