The new bankruptcy law which goes into effect in October 2005 is the most comprehensive overhaul of the system in over twenty five years. Banks and credit card companies have been seeking these changes, as they suggest that far too many people have been using bankruptcy to escape debts that they are capable of repaying. Opponents claim the law will make bankruptcy too expensive, and will disproportionately burden low and middle income filers.

The acknowledged effect of the new law will be to reduce the number of people filing for bankruptcy, and to push more of the filers into Chapter 13 (where a judge would set up a repayment plan) rather than Chapter 7 (where debts can be wiped out). Following are the key changes that will go into effect:

• A new means test will figure out how much a filer can afford to repay.
• A debtor will be required to complete a credit counseling program at their own expense.
• The homestead exemption will be limited in cases where the filer purchased the residence within three years and four months of filing for bankruptcy.
• Bankruptcy attorneys will now be held liable for any inaccuracies in their clients bankruptcy papers.
• The automatic stay on debt collection efforts will be weakened.

The Means Test

Under previous bankruptcy law, the court would decide which chapter an individual could file for, taking into consideration their finances and personal situation. Under the new law, there is a means test to determine if you can file and under which chapter. The means test is complicated, and if you file incorrectly the court can dismiss your case entirely and charge you and your attorney court costs. In short, if your income is more than your state’s average, and you can pay at least one hundred dollars a month after "reasonable" expenses, you would be ineligible for Chapter 7 and would have to file for a Chapter 13 repayment plan. It’s important to note that in order to figure out what "reasonable" monthly expenses are, the means test uses IRS figures for your state, not your actual expenses. For example, if the IRS has determined that a reasonable rent payment in your state is eight hundred dollars per month, that is the figure that will be used to determine how much you can pay your creditors, even if your actual rent is one thousand dollars per month.

Opponents to the law point out that expenses can vary widely in some states, and many people may be saddled with repayment plans they cannot realistically afford. They also argue that the means test will cut most people’s budgets so close that they will be unable to save any money for the five years they are adhering to the repayment plan.

Credit Counseling

The 2005 Bankruptcy Law requires individuals to go through credit counseling at least six months before they file for bankruptcy, and attend money management classes before their debts are discharged, all at the filer’s own expense. This will slow down the process a great deal, and supporters hope it will give people ample time to educate themselves and consider alternatives to bankruptcy. The obvious drawback is that it forces people who believe they are no longer capable of paying their debts to live with that debt for another six months and to pay for counseling and classes.

Homestead Exemption

Under the old bankruptcy system, there was a great deal of attention paid to celebrities and CEOs who would declare bankruptcy, but somehow manage to keep their million dollar homes. States like Florida, Iowa, Kansas, and Texas had unlimited homestead exemptions. In other words, a person could use all their money to buy a mansion in one of those states, then declare bankruptcy and have their debts wiped out because they had no free cash to pay the creditors. Under the new law, if a filer bought their home within three years and four months of filing for bankruptcy, the homestead exemption would be limited to $125, 000, regardless of what state the home is in.

Attorney Liability

Along with the means test, the other aspect of the 2005 law that has created the most controversy is attorney liability. If an individual’s bankruptcy filing is dismissed due to inaccurate financial information, there are steep fines that can be levied against the attorney handling the case. The aim here is to limit the fraud that some say is rampant in the current bankruptcy system. However, attorneys will now have to investigate each of their clients to ensure nothing in the financial information is wrong or inaccurate. Many attorneys who have offered low-cost bankruptcy services in low income areas will probably no longer be able to afford to do so. Some analysts suggest the cost of hiring a bankruptcy attorney will rise significantly, in some cases as high as $2,500.

The Automatic Stay

Under the previous bankruptcy system, filing brings immediate protection from collection activity, lawsuits, foreclosure, and eviction. This is known as an automatic stay. Under the new law, this protection is no longer absolute. For example, in cases where a judgment has already been secured, you can still be sued and even evicted while your bankruptcy case is being heard.

The Pros

Supporters of the new law believe that it will close the loopholes and incentives that have previously allowed individuals to escape debts they simply do not want to repay. They say the system was being abused and defrauded by gamblers, impulse shoppers, and divorcees, and was easily used by the wealthy to shelter their money from creditors. The law encourages people to accept responsibility for the debt they have built, and to find other ways to deal with it so they can pay back the money they owe. It also still provides a framework for those who truly need a fresh start.

The Cons

Opponents contend that the new law, especially the means test and attorney liability, place too much of a burden on poor and middle class Americans. Some argue that a large percentage of people who file bankruptcy do so because of unemployment and health crises, not because they were irresponsible or trying to commit fraud. They point out that the language in the law actually states that the courts will assume that a filing is "abusive" until the debtor proves otherwise. Much criticism has also noted that the law does little to curtail the lax lending policies of credit card companies. These companies have contributed to the escalating debt problem in this country by giving credit to individuals who obviously cannot afford it, as well as by deceptive advertising and hidden fees and policies.

Tips to Avoid Bankruptcy

Obviously none of this matters if you never get to the point where bankruptcy is your only option. Some tips to remember:

• Pay attention to your household finances, even if you are not the partner who is "good with money". Many people get into trouble because their partner is accumulating debt secretly, or after a divorce or death of a partner when they have no idea where the money is and are inexperienced with keeping financial records.
• No matter how well you are doing, don’t forget to save! Too many people continue to upgrade their lifestyle as they earn more money instead of increasing their savings. We have all heard about Enron and Worldcom, layoffs in major industries, and people who are burdened with huge medical bills, so we all know the importance of savings and emergency funds.
• Don’t put frivolous purchases on a credit card. If you need to make a large purchase, start saving for it before you put it on credit. That way, you can pay most or all of the bill when it arrives, instead of adding hundreds or even thousands of dollars in interest to your cost.
• If you see yourself starting to get into trouble, make changes right away. Debt tends to accumulate faster and faster and can get out of control before you know it
• Keep track of your daily expenses. Even the little ones like a cup of coffee or parking fees at the beach. You will be amazed by how much those small expenses add up. And once you know exactly where the money is going, you can figure out where to cut back.
• Call your credit card issuers and request an interest rate reduction. Most consumers are unaware that a simple phone call can save them money on their interest payments.
• Study after study shows that people who make most or all of their purchases with cash spend less money. If this seems like an impossible task, try using cash for one expense that you always use the credit card for, and add on from there.

Due to the 2005 Bankruptcy Law, it is more important than ever that you are responsible with your money. If you need help with your finances, there is an unlimited supply of information on how to save money on everyday purchases and how to organize your records on the internet and in bookstores.