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Debt Management Guide 2008
Bad credit
Bad credit can hurt a consumer in many ways. Understand how debt negotiation and bankruptcy work.
Bad credit
Can bankruptcy help you?
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The new bankruptcy
You may have heard: The rules for bankruptcy have changed.

"Probably the biggest change is that it's more complicated and expensive to file," says Sommer. Previously, a Chapter 7 (total liquidation) cost in the neighborhood of $500 to $1,500. Under the new system, a more realistic estimate would be $1,000 to "several thousand or more," he says.

For a Chapter 13 (debt reorganization), the cost had been in the range of $1,000 to $2,500, says Sommer. Now it's closer to $1,500 to $3,000.

But the people who need total liquidation bankruptcies are meeting the means tests and getting them, he says. "Lo and behold, it's what we said all along: There are not a lot of people out there filing Chapter 7 who can pay their debts," says Sommer.

There are a few extra hurdles to clear. Previously, consumers could decide if they wanted a reorganization or liquidation.  Now they must meet a means test. That involves filling out a lot more paperwork, says Sommer.

"Median incomes vary state-by-state," says Sommer. "But in almost every state, almost all who file Chapter 7 are under the median income."

Consumers also have to get some education before and after filing. "That can be a problem if you have to file within 30 minutes to stop repossession," says Sommer. "But it's not a problem if you have a few days."

The new rules try to limit repeat bankruptcies by tightening up the timeline for proving that a second bankruptcy will succeed.

Why this matters: Traditionally, two-thirds of Chapter 13 bankruptcies fail. "It's not easy for anyone to complete a Chapter 13," Sommer says.

But now, if you file for bankruptcy within a year of your old bankruptcy being dismissed, you only get 30 days to show the court why this one will work, says Sommer.

Different types of bankruptcy at a glance
Chapter 7: Also known as liquidation, allows individuals or businesses to give up nonexempt assets and walk away from most debts. To qualify, debtors must pass the means test -- that is, their income must be less than their state's median income.
Chapter 9: This section works like Chapter 11 and allows municipalities to reorganize debt.
Chapter 11: Also known as reorganization, this type of bankruptcy is for individuals and more commonly, businesses to restructure debt. Similar to Chapter 13, in that it allows the filer to draft a plan to repay some debt while retaining assets. Chapter 11 is much more complicated, and therefore expensive, making it financially feasible mainly for businesses and very wealthy individuals.
Chapter 12: Allows family farmers and fishermen with regular income to reorganize debt. It works very much like Chapter 13, but usually stretches out over three years.
Chapter 13: For individuals who need to restructure their debt load. Some creditors will be paid back in full with interest, others in full and the remainder will be repaid a percentage of the debt. Also used by creditors who do not qualify for Chapter 7 under the means test.
-- Updated: June 16, 2008
 
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