The “Bankruptcy Bill” – What it Means to You

You are probably aware that congress passed the so-called “Bankruptcy Bill,” a bill that makes a number of changes to the federal bankruptcy code. While you may know that the bill essentially makes it more difficult for a consumer to file for bankruptcy, you may be unaware of the specifics. Here’s what the Bankruptcy Bill, which goes into effect in October, 2005, basically means.

Under current bankruptcy law the trustee or judge makes a determination as to whether the debtor is abusing the bankruptcy system. Under the new law, a “means test” will be used and anyone who has an income that is at or over a set median amount will automatically be found to be abusing the system. These people must then disprove that claim.

Currently anyone who wishes to file bankruptcy may do so and has no problem finding legal counsel (bankruptcy lawyers compete for business almost as aggressively as personal injury lawyers.) With the new law a debtor must attempt an approved credit counseling or debt management program prior to filing bankruptcy. Lawyers representing the debtors may face personal liability if their clients are found to be ineligible for Chapter 7 filing. This is expected to result in fewer attorneys accepting bankruptcy cases and increased fees for the ones that do. The bankruptcy filing fees will also increase.

Bankruptcy law currently includes an “automatic stay” or cessation of collection activity against the debtor once bankruptcy has been filed. When the new law is in effect the automatic stay becomes conditional in many cases and creditors have more leeway in continuing collection activity during the bankruptcy proceedings.

Several types of debt are not dischargeable under the current laws. These include state and federal taxes, government guaranteed student loans, and family support payments. Under the new regulations more types of debt fall into the non-dischargeable category and the “presumption of fraud” category is broadened to include “luxury items” worth $500 or more that were purchased within 90 days of filing and cash advances of at least $750 made within 70 days of filing.

The new law makes other provisions as well but, generally speaking, the Bankruptcy Bill serves to increase the rights of creditors while reducing the rights and increasing the responsibilities of debtors. If bankruptcy is something you’ve been considering (and it should always be a last resort), it may be best to do so before the law goes into effect. After October 17, 2005, it will be much more difficult to do so.

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