Is The Era
of Bankruptcy Over?
Now that October 17 has come and gone, and the reformed bankruptcy laws have taken effect, where does that leave those of us who are in serious debt? For most of us, the landscape is pretty much the same. Bankruptcy may be a slightly more complicated option, but it's still an option. And for a few of us, it is much less attractive. A more positive way of looking at it: The new bankruptcy laws make hanging in there and paying off your bills and preserving your credit more attractive than ever.
Here's a quick synopsis of the changes brought about by The Bankruptcy Abuse and Consumer Protection Act of 2005:
- There's now a means test to obtain Chapter 7 Bankruptcy protection, which forgives a lot of the filer's debts. Generally speaking, the test will prevent those with a solid income (above the state's median income) from obtaining Chapter 7 protection. Those who don't qualify for Chapter 7 will be stuck with Chapter 13, which is essentially a debt-repayment plan.
- It will probably cost a bit more to file. Because of the stricter standards, there's more paperwork to be handled by lawyers and more work to be done by the filer. Most estimates put the increased amount in legal fees in the $500-$1,500 range.
- Completing a financial management course is now required.
- Under a Chapter 13 filing, where the repayment plan would last no more than three years, it can now last five years.
- If you file Chapter 7, now you will be ineligible to re-file for eight years.
In a nutshell, filing for bankruptcy is now a little more work, a little more money and a little less protection. But no, the era of bankruptcy is not over. For some it will still be the only option. But when you hear bankruptcy being referred to as a "fresh start" or a "clean slate" — under the old or new bankruptcy laws, this was always a misnomer. Indeed, under bankruptcy your debts could be reduced, but your credit, and thus, your ability to build wealth is greatly hampered. Plus, those who file bankruptcy have lost their last line of protection in that they can't file for bankruptcy for years. Under the old and new bankruptcy laws this remains true: The path to real financial freedom is paying off your debts, salvaging your credit, and saving some money each month.
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