With bankruptcy law near, make filing decision soon
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When you’re struggling to pay your bills, stress is a constant companion. Now, people with large debts have something else to worry about: whether to file for bankruptcy protection by Oct. 17. That’s the date a law that places new restrictions on bankruptcy filings will take effect. If you’re convinced bankruptcy is the only way to get out from under a mountain of debt, file before the law changes, bankruptcy attorneys say. After that, it will be harder to file under Chapter 7, which erases most debts. And even if you do qualify, filing will cost more. What will change on Oct. 17: •Tighter income limits. Individuals whose income exceeded their state’s median income during the previous six months may be ineligible for Chapter 7 bankruptcy. If those individuals can pay at least $100 a month toward debts after certain expenses are deducted, they’ll be required to file under Chapter 13 instead, which requires debtors to repay creditors under a schedule set up by the courts. About 85% of individuals who file under Chapter 7 earn income below their state median, so most people who seek bankruptcy protection will have no trouble meeting the new standard, says Sam Gerdano, executive director of the American Bankruptcy Institute. But the law could disqualify people who suffered a major financial setback, such as serious illness or unemployment, bankruptcy attorneys say. For example, someone who recently lost his job and has no near-term employment prospects could be barred from filing under Chapter 7 because his income during the past six months exceeded the state’s median income, says Nora Raum, a bankruptcy attorney in Arlington, Va. Concerns about these types of cases led some lawmakers to seek a reprieve for victims of Hurricane Katrina, which left thousands of people homeless and out of work. But supporters of the law say it gives bankruptcy judges authority to waive the restrictions for victims of “special circumstances,” such as a natural disaster. •More bankruptcy-proof loans. Even if you meet the means test, it will be harder to get rid of some types of debts after Oct. 17. The change is particularly significant for borrowers with a lot of student loans. Under current law, it’s extremely difficult to wipe out student loans from the government or a non-profit organization, even under Chapter 7 bankruptcy. The new law expands that provision to include student loans from private lenders, says Henry Sommer, editor-in-chief of Collier on Bankruptcy. •Higher costs. Filing for bankruptcy protection will be significantly more complicated and expensive after Oct. 17, Sommer says. Debtors will have to undergo credit counseling with an approved organization within six months of filing for bankruptcy. The law also requires more paperwork and imposes new accountability standards on attorneys, says Stephen Elias, co-author of How to File for Chapter 7 Bankruptcy. “Attorneys’ fees are going to go way up.” •You could lose your car. After Oct. 17, individuals who are ineligible for Chapter 7 will still have the option of setting up a repayment plan under Chapter 13. But Chapter 13 debtors will face a new provision that will make it harder for them to keep their cars, says John Ventura, a bankruptcy attorney and author of The Bankruptcy Kit. The provision requires debtors who file under Chapter 13 to repay the full balance of their car loans. Under the current law, individuals in Chapter 13 are only required to repay the car’s fair market value. Many cars depreciate as much as 50% after three years, so the fair market value is often much lower than the loan balance |