The New Bankruptcy Law

Before the run up to the effective date of the new law, bankruptcy filings rose to record numbers in virtually every bankruptcy court district in the United States. Terms like "means test" and "bankruptcy credit counseling" seemed to drive people to beat the deadline. After the law changed, many lawyers who used to file bankruptcy under the old law simply gave up filing bankruptcies because of a perception that the new bankruptcy law is overly complicated and time consuming. Filing bankruptcy under the new bankruptcy is a bit more complicated and is certainly more time consuming, but with effective bankruptcy counsel, successfully restructuring your debt is still possible.

One of the most feared provisions of the new law is the bankruptcy means test. The bankruptcy means test is a calculation used to determine what type of bankruptcy a debtor might file. To simplify things, the bankruptcy means test requires a debtor considering filing for bankruptcy to be matched against the median state income of the debtor's state of filing. Debtors who are over the median state income may have a more difficult time filing a chapter 7 bankruptcy and might have to file a chapter 13 bankruptcy which requires a monthly repayment to the bankruptcy court. The bankruptcy means test will not prevent a debtor from filing for bankruptcy; it will only help determine what type of bankruptcy must be filed. Most bankruptcy attorneys are finding out that the majority of people considering bankruptcy seem to be under the median state income initially and mostly unaffected by the bankruptcy means test.

Another requirement that seemed to strike fear in the hearts of debtors and attorneys everywhere is "bankruptcy credit counseling". The new bankruptcy law requires every debtor considering bankruptcy to complete bankruptcy credit counseling within the six months preceding the filing of the bankruptcy. Most bankruptcy attorneys are finding that the counseling requirement have not been an issue. Most debtors choose to do a brief telephone counseling session and the maximum cost to the debtor is set by law and cannot exceed $50.00.

The law revision got a lot of press that made it sound like it would be much more difficult—perhaps impossible—to file for bankruptcy protection after the new law went into effect. It’s true that there are some additional steps and additional paperwork. Filing for bankruptcy is a little more work and requires a little more preparation than it did before (although most of that work falls more on your bankruptcy attorney than it does on you). However, the end result is the same for most debtors. Once the means testing and the credit counseling session are over, the vast majority of people end up filing exactly the same kind of bankruptcy petition that they would have before the law changed. And for that very small percentage of people who may not be eligible to file a Chapter 7 bankruptcy, Chapter 13 is still available.

2. Most people who file for bankruptcy protection don’t lose any property.

The U.S. bankruptcy code provides exemptions that allow you to keep a certain amount of value in large property like your home and your automobile. In addition, there are extensive exemptions for clothing, furniture, and personal property. Bankruptcy law wouldn’t provide much protection if it left you without a place to live or a means to get back and forth to work! In addition, some states have exemptions available that go beyond those provided by the federal statute. Most people who are considering filing for bankruptcy don’t own a lot of high-ticket items—their property consists primarily of what they need to live and work. That’s exactly the kind of property that the bankruptcy law intends to protect from creditors.

3. You can rebuild your credit in just a few years after bankruptcy.

You may have heard that bankruptcy “stays on your credit” for ten years. That’s true, but it’s not the whole story. The truth is that your credit score—the number that has the greatest impact on your ability to get new credit and secure favorable rates—is more influenced by recent activity. Very soon after you’ve filed bankruptcy, you’ll begin to get credit offers. You’ll want to exercise great caution in deciding which offers to accept, and when. Many of the creditors who will solicit your business right after bankruptcy will attach outrageous fees and charges to these accounts—the kind of unexpected, mounting costs that will put you right back in financial trouble. However, by judiciously accepting credit accounts you can handle and making payments that are timely and are more than the minimum required, you can begin to rebuild your credit. Most debtors who are able to keep their bills current after bankruptcy are able to re-establish their credit in 2-4 years. Sure, the bankruptcy will still appear on your credit report, but if your current credit is solid, that’s not likely to keep you from buying a home or a car or even obtaining some unsecured credit accounts.

4. Most of the people who file for bankruptcy protection are honest, hard-working people who have fallen on hard times.

The credit industry would love for you to believe that only deadbeats file bankruptcy. This statement makes ordinary people reluctant to file bankruptcy when they need to, it creates an unsympathetic attitude toward those who do file bankruptcy, and it makes it easier to get support for legislation that will make it harder for people to file bankruptcy. And maybe it’s more comfortable for most of us, not to have to face up to the fact that circumstances in our economy are so desperate that 1 in 53 U.S. households had to file bankruptcy during 2005. The truth, however uncomfortable, is that most people who file bankruptcy don’t do so because they took vacations they couldn’t afford and bought luxury goods with their credit cards. Most people file bankruptcy for one of three reasons—or for a combination of these reasons: divorce, job loss, and extraordinary medical expenses.

5. Once you file for bankruptcy, your creditors can’t bother you anymore.

In most cases, when you file for bankruptcy, the court issues an “automatic stay”. The automatic stay is a court order that tells your creditors that since you’ve filed for bankruptcy protection, they can’t contact you anymore. They can’t call you, and they can’t send you threatening letters. They will need to stop garnishing your wages. If they were about to repossess your car, they’ll have to wait to see how the bankruptcy court resolves ownership of your car. Bankruptcy law even provides that creditors who violate the automatic stay can be required to pay damages—in some cases even punitive damages. There are exceptions in certain types of cases and for certain debts like criminal restitution, but in most cases and for most debts, the automatic stay will protect you from any creditor contact. Your bankruptcy attorney will explain this in detail to you.