Bankruptcy Reform

How Bankruptcy Reform Will Effect Future Filers

The Bankruptcy Reform Act of 2005 took effect October 17, 2005.

It was designed to make it harder for many bankruptcy filers to qualify for a Chapter Seven discharge, forcing them into Chapter Thirteen instead.

Under Chapter Thirteen, debtors will be forced to repay 30 to 50% of their debt over three to five years.

However, according to many experts, the act may affect less bankruptcy filers than expected, since only those who earn over the median income of their home state and who can pay at least $6000 a year for five years will be forced into Chapter 13. [Median income for a family of four was $65,100 in 2003, ranging from $46,000 in New Mexico to $82,500 in Massachusetts.]

Because the majority of filers will not be able to afford this, poorer filers will still be able to get a Chapter Seven discharge.

However the act increases costs, by requiring mandatory credit counseling before and after the bankruptcy filing at the filer’s expense.

Chapter Thirteen living allowances will be reduced and filers will be forced to give up many amenities because of strict budgeting guidelines they will be forced to adopt.

The filer's privacy will be less respected than before.

Creditors are trying to force as many filers in Chapter Thirteen as possible.

To date, it seems that this reform appears to have backfired on its sponsors. Before reform took effect there was a huge surge of filings. It was felt that after that surge, filings would fall off.

Instead they are now slowly starting to increase. This is causing banks to increase their reserves for charge offs due to increased bankruptcy activity.

The Department of Justice has so far approved the 71 agencies affiliated with the National Foundation for Credit Counseling to handle the required pre-bankruptcy counseling. Other agencies are trying to get into the act.

The counseling will cost $50 and is supposed to last 90 minutes. It appears that much of this counseling is either done in groups or over the phone and, so far at least, has not proven very helpful.

Apparantly reform has not made much difference yet.

Bankruptcy should be a last resort. However, if you are drowning in debt without any realistic hope of digging your way out, bankruptcy reform will probably not effect you.

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