October, 2002

Bankruptcy Reform

As Congress reconvenes from its summer recess, it appears they will enact the Bankruptcy Reform Act without much further debate.  It is expected that President Bush will sign the legislation into law when it is presented to him, and that it will be effective for cases filed six months after that point in time.

So what is the new law all about?  Simply put, it is going to make filing for bankruptcy protection much harder.  Here is a highlight of some of the most significant changes:

Þ     Credit Counseling Required - You will not be able to

         file for bankruptcy unless you have received approved

         credit counseling in the last 180 days.  Also, you will                                                  

         be required to take a financial management course

         prior to receiving a discharge from the court.

Þ     Needs Based Test - If you earn more than the

         median income for the State, (approximately $44,000)

         then your creditors may be able to force your case to

         be converted from a Ch. 7 to a Ch. 13 case.  (The

         difference is that Ch. 7 discharges you from all liability

         on your debts and Ch. 13 has you pay them off most of

         your debts through a payment plan.  Ch. 7 is more

         desireable to many people.)

Þ     Time Between Filing Extended - You will have to

         wait longer before you can file for bankruptcy a second

         time.  For Ch. 7 cases it went from 6 years to 8 years. 

         Ch. 13 cases, which had no wait period, will now be 5

         years. 

Overall, obtaining a complete discharge in bankruptcy is going to get a whole lot harder.  The types of debts which will be exempt from bankruptcy is going to be broadened; what and how much you have to pay back to your creditors is going to be more; and what you are allowed to keep after the whole process is done is going to be significantly less.   If you are in a position where you know that bankruptcy is inevitable, you may want to consider doing it before the reform act becomes enacted.