The New Bankruptcy Law: What You Need To Know By Larry Holmes

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The new bankruptcy law went into effect on Monday, October 17, 2005. And the events of the previous weekend were object lessons in human behavior as it applies to financial matters.

There were reports throughout the country that people were standing in lines for blocks waiting to get into courthouses to file Chapter 7 bankruptcy, which means they can wipe out their debts and start over. Now most people will have to file Chapter 13, which means they will have to pay their debts over time.

The demand to file Chapter 7 before the deadline was so great that the courts had to hand out bakery numbers and vacant rooms were opened to accommodate debtors. There was a report that one man bought a first-class airline ticket to meet with his advisor to file Chapter 7 bankruptcy. Is there any doubt that the ticket was bought with a credit card?

According to Lindquist Consulting, there were more than 200,000 personal bankruptcy filings for the week ending October 15, easily a record high. That's almost triple the number of filings in the week -- also a record. Sadly, the debt situation in the U.S. is out of control.

Here are the key changes that come with the new bankruptcy law…


There is something called a "Means Test." The means test calculates your monthly income less certain allowable expenses like food and housing. If your resulting income is less than the median income for your state, you may be able to file Chapter 7. If not, you will have to file Chapter 13.


There are expense allowances that are set by the IRS. They're pretty tough. The IRS allows a food allowance of about $200 a month and a housing allowance of about $800 a month. If your actual expenses for food and housing are more than that, too bad.


Some states -- like Texas -- have an unlimited homestead exemption, which allows you to protect your home from creditors. The new law prevents you from filing in a state that is more favorable to debtors unless you've lived there for at least two years.


Filers must go through mandatory credit counseling within six months of filing a bankruptcy petition.


There is more paperwork involved, so you it will cost you more to file. Under the old law, a consumer might have paid between $1,500 and $3,500 to file. Because of the increased paperwork, the new fees will probably be considerably more.


If you purchased luxury items or received a cash advance of more than $500 within 60 days of filing, you will not be able to include them in your bankruptcy filing. They will have to be repaid.

So under the new bankruptcy law there will be a lot fewer Chapter 7 and a lot more Chapter 13 filings. With a Chapter 13 bankruptcy, you're put on a repayment plan. Under Chapter 13, you get to keep most of what you own and you will be under a plan to repay your creditors over three to five years. Your bankruptcy isn't complete until you pay off all of your creditors according to your plan.

Your best bet? Get out of debt and stay debt-free. When you're in debt you have money working against you instead of for you. And that's exactly the opposite of what you want if you want to achieve financial freedom.


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