bankruptcy laws: What You Need to Know

Do New Bankruptcy Laws Help Consumers?

In 2005, President Bush signed a reformed bankruptcy law, creating the Bankruptcy Abuse Prevention and Consumer Protection Act. This new law was created to prevent people from using chapter 7 bankruptcy as a way to get out of debt they could in fact pay, to ensure that creditors received some of the money that is owed to them, and ostensibly to protect consumers. Does the new law protect the people who are filing for bankruptcy?

The bankruptcy law made it harder for people to file for chapter 7 bankruptcy. In order to do so, the debtor has to pass the means test. This test takes into account your income as compared to the state average as well as your disposable income. Your disposable income is the amount you make less living expenses. If you make less than a certain amount of disposable income, then you can file for chapter 7.

In theory, this does work to prevent people with enough money to pay their debts in some form from being able to get the completely discharged through chapter 7. In reality, though, it makes people who are struggling less able to get the help they need. The means test for disposable income does not use your actual living expenses in the formula; instead they use IRS-approved figures, which may not take into account rising mortgage rates or the explosion in the cost of living. So, the bankruptcy court can end up determining that you have far more disposable income than you really do. You are then ineligible for relief under chapter 7 and have to file for chapter 13, which requires the repayment of debts.

Another change in the bankruptcy laws mandates credit counseling before you can file for bankruptcy and before your debts are discharged. Again, this is a great idea in theory. People who have little money or who have mismanaged debt can receive professional credit counseling. It may help them discover alternatives to bankruptcy or help them to budget and reorganize their spending. The catch, though, is that it again puts even more pressure on those who are struggling financially. While federally mandated, the credit counseling is not federally funded. You have to pay for both sessions, which cost about $50. This may not seem like much, but if you are struggling to pay your bills each month, it can be a burden. Still, credit counseling is a good idea and ultimately should benefit the consumer.

A result of the new bankruptcy laws is the increase in filing fees. Before October, 2005, the cost of filing a chapter 7 petition was $200 and a chapter 13 petition was $185. After the law, that climbed to $299 for chapter 7 and $274 for chapter 13. In addition, lawyers were given new responsibility – they now have to conduct investigations into their clients’ financial lives and are liable for any misinformation, errors, or falsehoods that make it into the court documents. More time equals more money. The consumer picks up the larger bill. Yet another side effect is that less and less lawyers are willing to take on bankruptcy cases because of the increased risk and cost.
New bankruptcy laws do benefit the consumer in some ways, such as the credit counseling. And if it deters people from wrongfully filing for chapter 7, then ultimately it will benefit everyone else who files. But the increase in cost hurts the people who are struggling most. It is more important than ever to find alternatives to bankruptcy, such as learning new money management strategies or consulting with a debt settlement company.