New Bankruptcy Reform Laws Will Keep Many Consumers from Filing Bankruptcy
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 marks the
most sweeping reform of the country’s bankruptcy laws since they were enacted in
1978. The legislation, which is strongly supported by major credit institutions,
aims to curb the rising trend of bankruptcy filing and strengthen the system’s
integrity by making it extremely difficult for high income consumers and serial
filers to qualify for Chapter 7 bankruptcy. However, financial experts warn that
the new legislation will have detrimental effects for the majority of bankruptcy
filers who are in genuine financial distress by severely restricting their
ability to qualify for bankruptcy.
Under the new provisions of the reform legislation, all debtors must present a
certificate from an accredited nonprofit credit counseling organization
verifying the debtor has completed credit counseling and an individual budget
analysis. This certificate must be submitted no later than 180 days before
filing. The reform bill also places a cap on the money that is legally protected
from bankruptcy proceedings. This includes a reduction in the amount of money
that can be saved in an IRA or retirement account and a reduction in the money
that can be allocated for private or patriarchal school tuition.
However, the most controversial element of the reform is the “Means-Test”. The
“Means-Test” determines a debtor’s eligibility to file Chapter 7 bankruptcy by
examining three distinct elements of the debtor’s income over the last six
months. If the debtor’s income exceeds the state’s median income, if the debtor
has at least $100 excess monthly income, or if the debtor has enough excess
monthly income to pay at least 25 percent of their total debt over a five year
period, then he or she will be denied access to Chapter 7 bankruptcy. As a
result, people with even the slightest ability to repay their debts are no
longer able to seek debt reduction through bankruptcy.
Is the Reform Justified?
Over the last decade, the number of bankruptcy cases filed in the United States
has nearly doubled. Lawmakers viewed this rising pattern as an indication that
people were abusing the system. However, this is not necessarily the case.
According to Suzann Boas, president of the Consumer Credit Counseling Service of
Atlanta, most consumers considering bankruptcy have already reached a point
where debt reduction is the only way they will ever become debt free. When a
potential filer visits her organization for pre-bankruptcy credit counseling,
Susan explains, she is rarely able to help the person with services her
organization offers, including debt consolidation. Unfortunately, the provisions
of the new bankruptcy legislation exclude many of the struggling consumers who
legitimately need assistance from filing Chapter 7 bankruptcy.
Help for Big Spenders
All hope is not lost. While many consumers no longer qualify for Chapter 7
bankruptcy, debt arbitration or debt settlement remains a viable and easily
accessible option for consumers who are serious about getting out of debt.
Unlike debt consolidation, which simply rearranges debt and interest rates, a
debt arbitration company negotiates a mutually beneficial settlement with the
consumer’s creditors to reduce the actual principle balance by an average of
40-60 percent. Debt arbitration also enables the consumer to combine all
payments into one manageable monthly payment that he or she controls. And best
of all, it is not a bankruptcy.
About Knockout Debt
Knockout Debt is a professional debt arbitration company that specializes in helping heavily indebted consumers regain financial stability by negotiating a significant reduction of the consumer’s total principle debt. By utilizing experienced negotiators, long-standing relationships with creditors, and financial acumen, Knockout Debt designs customized debt reduction solutions that enable clients to lower their debt to income ratio without filing bankruptcy.
