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Understanding the new bankruptcy law

Being broke has gotten tougher. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, designed to curb abusive consumer bankruptcy filings, affects anyone who files for bankruptcy. It went into effect Oct. 17.

While there are a few bright spots in the law, the overall picture is dim for consumers deeply in debt.

Its provisions force consumers into more-expensive proceedings potholed with potential pitfalls. Miss one filing deadline and your bankruptcy could be dismissed, leaving you facing a series of escalating penalties when you refile that will make it that much harder to get back on your feet, financially.

That's not the worst part. A complicated means test, administered by your own attorney, will determine whether you'll be allowed to file under Chapter 7, which forgives debt, or Chapter 13, which sets out a repayment plan.

In addition, your collateral, including furniture, cars and other possessions, will be assessed at a higher value, inflating the overall value of your assets.

When you're worth more, your creditors can potentially get more out of you. It will also be harder to get out from under car loans, overdue taxes, student loans and credit card debt.

While cracking down on deadbeats who abuse the system isn't going to leave anyone reaching for the tissue box, many of those who file for bankruptcy are pushed to the edge by unemployment and catastrophic health problems.

"There are dozens of catches that will make it difficult for people who legitimately need to file for bankruptcy," says Travis Plunkett, legislative director for the Consumer Federation of America. "The strategy of the people who supported this bill appears to be death by a thousand cuts. There are lot of traps and gotchas designed to snare people and keep them from discharging debt that they really may need to get out from under."

Pre-filing changes
Means test. The means test is a major change in the law. It is used to determine whether an individual can file under Chapter 7 or Chapter 13 and is administered by the client's attorney. Chapter 7 generally liquidates the debts of consumers, while Chapter 13 requires them to pay back their secured debt and as much of their unsecured debt as possible.

Here is an overview of the means test:

  • Income: Using your state's median income, your attorney determines whether your income, determined by averaging those of the past six months, is above or below that median. That figure must be used even if it is no longer accurate; that is, if the consumer has lost his or her job, or now makes less money.
Next: Personal possessions assessed at a higher value
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