Law Makes It Harder to Declare Bankruptcy

Now it's more important than ever to take careful control over your finances. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is in effect with more stringent rules for declaring bankruptcy.

In the past, most consumers who filed for bankruptcy used either Chapter 7 or Chapter 13. With a Chapter 7 bankruptcy, a debtor's assets are liquidated (except for those exempted by the state*) and distributed to creditors. If there aren't enough assets to pay back the creditors in full, the remaining debts are canceled. As a result, some creditors ended up with nothing paid back to them.

With a Chapter 13 bankruptcy, the debtor is put on a repayment plan of up to five years. In general, creditors get more money than they would with a Chapter 7 bankruptcy.

How Have Things Changed?
The biggest change for consumers is that it has become more difficult to file for Chapter 7 bankruptcy. That means consumers who find themselves over their heads in debt cannot as easily discharge their unpaid bills. In addition, those seeking bankruptcy are required to receive budget and debt counseling within 180 days of filing except under certain circumstances.

Debtors who cannot file for Chapter 7 may still file for Chapter 13, but the courts use new and stricter guidelines to determine how much the debtor can reasonably afford to pay back. The rules may result in higher amounts paid to creditors than under the old laws.

As a result of the new law, many credit card issuers have or will begin requiring higher minimum monthly payments – for example, 4% of the unpaid balance rather than 2% may be typical.

The law does contain special accommodations for active duty military personnel, low-income veterans and individuals with serious medical conditions. Also, consumer lenders are required to make additional disclosures regarding minimum payments, introductory rates, late fees and other information regarding credit cards and other loans.

To learn more about how the new law, visit the United States Bankruptcy Court Web site at www.uscourts.gov/bankruptcycourts.html. Click on "Court Links" for links to state-specific information.