Understanding Bankruptcy Law

Sweeping changes were made in the bankruptcy law in US in the year 2005, which came into effect on October 17, 2005.  It was called the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” which meant even more trouble to people who are struggling with financial crisis.  Thousands of Americans are finding this new law very tough and are prepared to forgo the courts system of filing bankruptcy.  The debt collectors are using this new law to intimidate and to harass people who don’t know or understand their rights.

Although the name of the law says it is for consumer protection, but the big question is that how does this law protect the consumers?  The main purpose of this law is to eliminate bankruptcy of convenience.  According to the sponsors of the Bill, most of the cases of bankruptcy are filed by irresponsible spendthrifts who do not want to payback their creditors.  The bankruptcy costs a fortune to the credit card companies and these costs are in turn imposed on the consumers in the form of high interest rates.  The credit card companies were bent on passing this law for more than a decade.  As they think that bankruptcy were misused by wealthy individuals who could have paid their debts but defrauded creditors.  But the facts have a different say on this:

When bankruptcy filings doubled, it was the credit card industry who tripled their profits.
Also, they were not held accountable for targeting easy credits to people who cannot afford such loans and in turn has increased the bankruptcy cases.  Many of the bankruptcy cases filed by elderly people were due to medical bills and loss of jobs.  Bankruptcies were filed due to lack of insurance coverage.

On the whole this new bankruptcy law is a boon to the credit card companies, as simple as that. 

The key points of Bankruptcy law:

A “Means test” has been introduced to show that the person filing for bankruptcy is not abusing the law.  This test is used to calculate the monthly income minus the expenses which are allowed.  The “median income” varies from state to state.  If the person fails the means test, then he should file under Chapter 13 Bankruptcy.

Guidelines are devised for allowable expenses by the IRS.  They are very stingy.  Also the person should go through the counseling course, which is being approved within 180 days of filing bankruptcy.  The cost of the course is nearly $75, which means it is not free of cost.

The new bankruptcy law discourages the person to look for best deals, as they are not allowed to file for bankruptcy in a very favorable state unless he has resided in that place for a minimum of 2 years time.

This bankruptcy law also calls for more paperwork, the consumer should present documentation containing a list of secured and unsecured creditors, a detailed list of expenses and earnings, assets, liabilities, proof of undertaking the credit counseling course, recent tax return papers, photo identification etc.

Also a heavy fees needs to be paid by the person who is filing for bankruptcy to the attorney to certify that the figures presented by him are accurate.  In turn the attorney should also do a thorough checking on the information provided by his client to certify so.