Tougher Test For Bankruptcy

Tougher Test For Bankruptcy

If you’ve been thinking about filing for bankruptcy, perhaps you should think again. The newly enacted Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 went into effect October 17, and among other stipulations, it forces many who would file for Chapter 7 bankruptcy to instead file for Chapter 13 bankruptcy and commit to a payment plan.

For consumers struggling with credit card and other debt, the new law places more pressure on them to settle their debts instead of seeking a “new start” through bankruptcy. While the bill is intended to curtail bankruptcy abuse from debtors who can afford to pay their creditors, Arlene Gordon Oliver, a partner at Rattet, Pasternak & Gordon Oliver L.L.P. in Harrison, New York, says the bill amounts to “indentured servitude.”

“Very poor people are not filing bankruptcy,” says Oliver, who also chairs the National Bar Association’s bankruptcy law division. “The people [filing bankruptcy] are from middle-class America, with a house, assets, and children to feed. They file bankruptcy due to a lack of a job, medical expenses, or the death of a spouse.”

According to Harvard law professor Elizabeth Warren, about 2 million Americans filed bankruptcy last year because of medical expenses — and three-quarters of them had health insurance. Those who advocated for the changes in bankruptcy legislation, such as the Credit Union National Association, say that an estimated 40% of credit union losses last year, about $900 million, were bankruptcy-related.

How differently will bankruptcy claims be handled?

Since an estimated 70% of bankruptcy filings are Chapter 7, the new law uses a means test to determine a filer’s ability to continue paying his or her debts over an extended period of time.

Consumers who wish to file for bankruptcy have to take required credit-counseling classes. They are also now asked to take a financial management class before their case is final.

Up to $5,000, per beneficiary, in education savings is exempted, subject to certain IRS requirements.

Child support and alimony payments take priority over settling up with certain creditors.

Non-dischargeable debt now includes state and local taxes. Federal taxes were non-dischargeable prior to the Act.

Samuel J. Gerdano, executive director of the American Bankruptcy Institute in Alexandria, Virginia, advises consumers to consider filing for bankruptcy only if they feel they have no other choice. Then consult a licensed and experienced bankruptcy attorney. Do a serious individual assessment,” says Gerdano. “The future of your gaining access to affordable credit is at stake.”

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