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New Bankruptcy Laws Will Make it Tougher for Consumers to Clear Debts

New bankruptcy laws enacted by Congress in 2005 have changed the way consumers, businesses, corporations and farmers obtain protection from creditors. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) includes provisions which require debtors to engage in credit counseling and undergo the process of the 'means' test.

Under the new bankruptcy laws, filing for bankruptcy has become considerably more complex and costly. BAPCPA was enacted to prevent consumers from racking up large amounts of debts, than filing bankruptcy to avoid repayment. However, the strict provisions have made it difficult for individuals who require debt relief caused by mounting medical bills and inflated mortgage payments.

In the past, filing personal bankruptcy was relatively simple. Debtors hired a bankruptcy attorney to draft a petition for debt relief. The majority of debtors filed for Chapter 7, liquidated non-exempt assets, had their remaining debts discharged and were given the opportunity for a fresh financial start. In some cases, filing bankruptcy was so easy consumers filed for bankruptcy protection without legal counsel.

The new bankruptcy laws put an end to that era. While there is no law requiring debtors to retain the services of bankruptcy attorneys, few people are able to comply with BAPCPA on their own. One missed deadline or improper form can cause the bankruptcy petition to be dismissed.

The BAPCPA 'means' test compares the debtor's average income for six months prior to filing for bankruptcy against the median income level for the state where the debtor resides. If the debtor's income falls below the median income level, they will be eligible to file for Chapter 7 bankruptcy. However, if their income is the same or higher than the median level, debtors are required to file for Chapter 13 bankruptcy and repay a portion of their debts.

Prior to the new bankruptcy laws, it was quite easy for consumers to file personal bankruptcy. In many instances, consumers were able to file without the assistance of bankruptcy attorneys. Today, filing bankruptcy is considerable more difficult. Not only do consumers need to retain a lawyer, they must also pass a 'means' test and obtain credit counseling from an agency approved through the U.S. Trustee Program.

In October 2008, the new bankruptcy laws will adopt a new median income plan where figures are based on income by family size. The U.S. Trustee Program website provides a complete list of new income levels by state.

While the new bankruptcy laws add additional layers of complexity, consumers can still obtain relief through Chapter 7 and Chapter 13 bankruptcy. Prior to filing for bankruptcy protection, debtors should consider various bankruptcy alternatives including credit counseling, debt consolidation, debt settlement and budgeting.

Keep in mind there is no guarantee a judge will approve your bankruptcy petition. Although every U.S. citizen has the right to petition the court for protection, there is no law stating that a judge has to approve every case.

If you are considering bankruptcy, be certain to take time and research all available options. Then be certain to understand the pros and cons of each option. Although bankruptcy can offer debt relief, there are other options available that are not as damaging to your credit history and may provide a better outcome in the long run.

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Published on October 28, 2008 at 10:04 PM

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