New bankruptcy rules: More hurdles for debtors

Life is about to get a lot tougher for people who get in over their heads with debt. When the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 takes effect, which is expected to be in October, it will be harder to erase debts and make a fresh start. The idea behind the law is to get tapped-out consumers to pay back more of the money they owe to credit-card companies, banks, and other lenders.

So if you're overwhelmed by debt and considering bankruptcy, file soon. But even if you're nowhere near bankruptcy, you should consider the ramifications of the new law. In today's volatile economy, growing job insecurity combined with skyrocketing health-care costs and a frayed social safety net can easily send even a prudent borrower off a financial cliff.

"Last year, nearly half of all households that filed for bankruptcy were struggling in the aftermath of a serious medical problem, and three-quarters of them had health insurance when they were struck by illness," says Elizabeth Warren, a professor at Harvard Law School. "Families run into problems when they resort to second mortgages, bank overdrafts, and credit cards to cover treatments and drugs."

Here are four important changes to the rules and what they would mean to you if you needed to file for bankruptcy:

1. You could get stuck in a debt-repayment trap. Many middle-income Americans will no longer be able to file under Chapter 7, the most-often-used option because it allows you to wipe out your debts, though you may have to sell your home and cars. Instead, you may be forced to file under Chapter 13, which allows you to keep your home and cars if you can make payments but requires you to stick to a repayment program for other debts. You could be pushed into a Chapter 13 filing if your family's income exceeds the state median and leaves you with at least $100 in monthly discretionary income. You'll have to apply that "extra" income, as well as cash from the sale of property such as homes and family heirlooms, to your debt-repayment plan, which will last up to five years. During that time, you'll be living on the same strict budget that the Internal Revenue Service imposes on tax deadbeats.

2. Legal help will cost more, if you can find it. Today, legal fees for a Chapter 7 filing run between $500 and $1,000. A Chapter 13 filer can expect to pay $1,500 to $2,000. But come October legal costs are likely to rise sharply, says Stephen Elias, bankruptcy attorney and co-author of "How to File for Chapter 7 Bankruptcy" (Nolo). Good help will be hard to find at any price. Bankruptcy court trustees can now hold filers' attorneys accountable for any paperwork snafus, and filers will have new grounds on which to sue them. Elias thinks the new liability will drive many attorneys out of the field and force up fees.

3. Creditors will have more control over your assets. Creditors will now be entitled to look over your tax filings, compare them against court-filed income and expenditure declarations, and challenge discrepancies. They may also be able to foreclose on property and garnish wages even after you've filed for bankruptcy if you haven't properly notified them. What's more, Chapter 13 filers may have to pay auto lenders more of their debt to hold onto cars. And generous exemptions for new home buyers in Florida and Texas are being sharply curtailed. Protections for qualified retirement assets, including pensions and 401(k) plans, are left mostly untouched. A recent Supreme Court ruling reaffirmed that Individual Retirement Accounts are also off-limits to creditors.

4. You'll have to go for debt counseling. But bankruptcy officials have yet to approve curriculums or license organizations to offer this service. What's worse, the credit-counseling industry hasn't had a good track record. (See below.) So, it's anyone's guess what filers will do until a system is in place.

To find out if debt settlement is right for you, fill out our FREE, no-obligation on-line form or call 866-865-6959 and get started on your new debt-free life!

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