Bankruptcy

Due to the overwhelming number of Americans that chose to file for bankruptcy in recent years, a new bankruptcy act, titled the Bankruptcy Abuse Prevention and Consumer Protection Act (S.256), came into effect in 2005.

Under the old law, filing for Chapter 7, or straight bankruptcy, was relatively easy and it gave debtors an escape path when they could no longer afford to pay their bills. In Chapter 7 Bankruptcy, your assets are sold to repay your debts, and anything that cannot be repaid is written off.

Similarly, Chapter 13 Bankruptcy, or personal reorganization, lets creditors work out a repayment plan with debtors over a five year period. Chapter 13 Bankruptcy is not considered as harsh on your credit history as Chapter 7, giving you an easier path toward regrouping following the procedure.

Now under the new law, the IRS has made it more difficult for people to file Chapter 7 bankruptcy, at the same time encouraging people who would've initially taken that route to look into Chapter 13 bankruptcy. This is primarily due to the fact that the IRS wants people to take more responsibility for their financial actions and not rely on the government as a scapegoat.

Included in the Bankruptcy Abuse Prevention and Consumer Protection Act are some new additions. Notably, before seeking out bankruptcy, you are now required to consult a credit counseling agency six months prior. In addition, you are also required to take money management lessons to show that you are making a concerted effort to dig yourself out of your financial woes.

Under the new law, if your income is greater than the median income in your state, your bankruptcy request can be denied by the courts. If your income is above the median and you are able to repay 25% of your debt, your only option is filing for Chapter 13 bankruptcy. When you do file for bankruptcy, you are given a 45 day window to present all the necessary documents or you case will be thrown out.

Additionally, the new law puts a lot of pressure on bankruptcy attorneys to make sure the information they submit is accurate, as they are responsible for all presented documents. Furthermore, they are also required to verify clients' information, disclose all fees, present a written contract, and acknowledge that you are not required to hire an attorney in order to file bankruptcy.

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