"The worst bankruptcy in the world is the person who has lost his enthusiasm." ~ H. W. Arnold
On October 17th, new laws will go into effect, making it tougher for individuals to file for bankruptcy. The new rules have been given a great deal of publicity; so many consumers are rushing to file prior to the new law taking effect. According to the American Bankruptcy Institute, the number of filings was anticipated to increase another 10% to 20% by the end of the third quarter 2005…and second quarter 2005 was the largest single filing quarter in history with 458,597 filings.
So what is changing so drastically with the new laws?
First of all, the costs associated with filing for bankruptcy will most likely increase by three to four times the current amount, purely due to the complexity of the new law. Second, the new law requires that prior to filing bankruptcy, an individual must have sought credit counseling from an approved agency, within the six months proceeding filing for bankruptcy. Third and probably most dramatic, many bankruptcies will now have to use Chapter 13 – a reorganization of debt – as opposed to the more commonly used Chapter 7 – more often a complete clear out of debt, allowing the protection of certain assets.
Chapter 13 requires that a plan be filed with the court to repay the debts associated with the bankruptcy in three to five years. But if the filer could not keep up with the set payment plan, the individual could change the bankruptcy from a Chapter 13 to a Chapter 7 and have the remaining debts cancelled. The new law may no longer allow individuals to make this switch.
The rule reads that if someone earns less than the median household income for their state, they will be allowed to file Chapter 7. But if someone earns more than the median income and can afford a $100 per month debt payment, then generally Chapter 13 will be the only option. And the IRS will be the ones determining this based on the persons income and expenses – the individual will not be allowed to make this determination.
As always, it is important to seek the advice of a legal professional on laws governing your particular area.
Reprinted from weekly newsletter by Eddie Neiman, a specialist in mortgage debt management at CTX Mortgage in Encino, California.
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