April, 2005

Bankruptcy Reform Act

Three years ago I reported on the impending changes to the bankruptcy laws.  I told you that a tough new bill was before the Senate and that its passage was imminent.  They just passed it last month.  Now it goes to the House of Representatives.  I am told the House will pass this forthwith.  I wonder if "forthwith" is any quicker than "imminent".

So let's take a re-look at what the "new" law is about.  Simply put, it is going to make filing for bankruptcy much, much harder.  Here is a highlight of some of the most significant changes:

- 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.  Believe me, I have a list of people who were watching the clock to file a second or third time. 

- Credit Counseling Required - You will not get relief in bankruptcy unless you first get credit counseling and take financial management courses.  This may be closing the barn door after the horse gets out, but probably not a bad idea considering some of those horses who file two or three times.

- Needs Based Test - If you earn more than the median income for your State, (approximately $52,000 in Massachusetts) then your creditors may be able to force your case to be converted from Chapter 7 to Chapter 13.  The difference is Ch. 13 makes you go on a three year payment plan before you get discharged, while Ch. 7 just lets you walk away from your debts scot-free.

Overall, obtaining relief in bankruptcy is a whole lot harder.  You get to keep less, and have to pay back more.  And there are now more types of debts you can't discharge at all.  If you know that bankruptcy is inevitable for you, do it before the reform act becomes enacted.