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Tougher Bankruptcy Laws Take Effect October 2005

James H. Dimmitt -- Reform will make filing for bankruptcy as a means of clearing debt more difficult, requiring instead that debtors repay their creditors over a five-year period.

In just a few short weeks, President Bush's Bankruptcy Abuse Prevention and Consumer Protection Act will take effect. In a nutshell, the new law, which goes into effect on October 17, 2005, makes it more difficult to cancel your debts under Chapter 7 Bankruptcy protection.

Instead, consumers will find themselves having to file for Chapter 13 Bankruptcy protection and paying back their creditors over a five-year period.

Here's a look into some of the major changes that will affect consumers choosing to file for bankruptcy after the new law goes into effect:

Qualifying: Chapter 7 or Chapter 13?

To be able to qualify for protection under Chapter 7 bankruptcy, consumers will have to face a means test. The means test determines if your household falls above or below the median income in the state where you reside.

Those whose total is greater than the state median income will not qualify to cancel debts under Chapter 7 protection and will alternately have to file under Chapter 13 and pay back their creditors.

The major intent of bankruptcy reform is to require people, who can afford to make some payments towards their debt, to make these payments, while still affording them the right to have the rest of their debt erased.

The amount you have to pay back under Chapter 13 protection will be greater because instead of a 3-year pay back period, that time frame is now extended to five years -- to ensure your creditors get paid.

Credit Counseling

Anyone filing for bankruptcy under the new law will be required to go through mandatory credit counseling. Be careful before choosing a credit counselor as this field is filled with people looking to line their pockets while emptying yours.

To find a trustworthy counselor, check to see if there are any complaints against them or their organization filed with your local Better Business Bureau.

Secondly, find out if they are certified by the National Foundation of Credit Counselors or the Association of Independent Consumer Credit Counseling Agencies.

Finally, find out if they have not-for-profit status. Personally I recommend Consumer Credit Counseling Services as they meet all three of the above criteria. They can be reached at 1-800-888-2227 and can connect you with a local office.

The Cost Factor

Filing for Chapter 7 protection under the old laws normally cost under $1,000. You should expect to pay more under the new laws as filing fees have been increased by $60. Additionally, your attorney will be required to double check all your financial information, which will take more of his or her time.

Also there is greater liability imposed on the lawyer, which may cause their liability insurance to increase, all of which gets passed on to their clients in the form of higher fees. Under the new law, many are expecting fees to increase between 25-50%.

Why Were the Laws Changed?

The bottom line is that major commercial creditors lobbied hard for reform. Companies like CitiBank, MBNA, and other credit card issuers actively contributed proposed amendments along with generous financial support to reforming the bankruptcy laws -- and in their favor, according to many consumer protection groups.

James is editor of "To Your Credit," a free weekly newsletter with tips to help you manage your personal finances. Subscribe today and receive his ebook Identity Theft -- How To Avoid Becoming the Next Victim! and other free bonuses by visiting

© 2005 James Dimmitt

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