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The purpose of the new legislation, which President Bush recently signed into law, is to eliminate the so-called “bankruptcy of convenience.” Supporters of the bill allege that most personal bankruptcies are brought about by those with compulsive drug, gambling or shopping problems, and that such people simply don't want to pay their bills.
Studies show that most bankruptcies are actually brought about by injury, job loss or illness. Nevertheless, the law was passed with the overwhelming support of both parties in Congress, and it reads like a love letter to the credit card companies. Here's what it means for those with problem debt:
Those considering filing for bankruptcy will have to pass a means test. This will determine if the debtors income is above a certain threshold. Most people will qualify.
If you pass the means test, you will no longer be allowed to file for bankruptcy under Chapter 7 of the bankruptcy code. Chapter 7 allowed the courts to wipe away all personal debt in order to give the debtor a fresh start.
Instead, debtors will have to file under Chapter 13, which requires a five year repayment plan of personal debt. If you incur debt, you will have to repay it. It's pretty much as simple as that.
In addition, there are no provisions for illness, job loss, accident or injury, or identity theft. If someone steals your identity and runs up tens of thousands of dollars in debt in your name, you will be held responsible for it.
Attorneys who represent debtors will now be held responsible for the accuracy of the information presented to the courts in bankruptcy cases. Because of this provision, it is likely that many attorneys who handle bankruptcy cases will stop handling them. Others who continue to do so will probably raise their rates substantially in order to cover the additional liability.
Bankruptcy Law Changes - The Good
Members of Congress who sponsored the changes in the law have rightly pointed out that the cost of bankruptcy due to irresponsible spending runs into the billions of dollars, and those costs are passed on to the consumer in the form of higher interest rates on credit cards. With a lot of those costs eliminated through the new legislation, the credit card companies will have reduced costs, and will pass the savings on to consumers in the form of lower interest rates.
They will not.
There is nothing good about this legislation for the consumer. After October 2005, filing for personal bankruptcy will not be helpful for most consumers.