Bankruptcy Breakdown
By Jennifer Delcamp

If you hear the distant rumble of pounding feet, it may be hordes of people rushing to file bankruptcy before the law changes. The new law may make it more difficult to file certain types of bankruptcy. Changes in the bankruptcy laws have been proposed for years. Every time they seemed close to passing, the discussion was tabled and nothing ever happened. Well, as of April 2005, the law has been signed and will go into effect in October 2005. I am not a lawyer and I am not going to express my personal feelings about the controversial changes so I will just give a broad overview of what changes the new law will bring, especially where credit counseling is concerned. If you’d like to view the entire 513 page law please visit http://bankruptcymedia.com/bkfinder/article%20folder/Senate256passed.pdf.

Regarding personal bankruptcy, there are 2 main types: Chapter 7 wipes out all allowable debts and allows certain personal property exemptions. Basically, you get to keep some approved assets and must liquidate others. Chapter 13 is a court approved repayment plan. Basically, you repay a portion of your debt over a period of time and at the end of that period, the rest of the debt is wiped out. The new law will make it harder to file Chapter 7 and will steer more people to repay a portion of their debts through Chapter 13. There are certain income requirements (based on the median income of each state) and a means test to determine which type of bankruptcy you may be allowed to file.

The new law also includes new requirements concerning credit counseling. According to the bankruptcy legislation, debtors must receive a briefing from an approved credit counseling agency before they are allowed to file bankruptcy. This briefing should include alternatives to bankruptcy and teach debtors how to set up a budget.

Once debtors actually file bankruptcy, they must also attend a financial literacy course that teaches them basic money management skills before their bankruptcy is complete (“discharged” in legal terms). I think the basic intent is to teach consumers to make better financial decisions the next time around so that they don’t end up in financial trouble again. The law also changes how often you can file Chapter 7 bankruptcy, extending the time from every 6 years to once every 8 years.

As soon as the law was passed, my agency began receiving calls from attorneys’ offices that wanted to know how they could get their employees certified as credit counselors. According to the law, they can’t. There are strict requirements that say which agencies may be approved to offer the pre-filing briefing and the pre-discharge course. Approved credit counseling agencies must be non-profit, credit professionals, with extensive credit counseling experience.  They must apply with the bankruptcy trustee to become an approved agency. Attorneys will have access to which agencies are approved so that they may guide their clients to the right counseling agency when the time comes.

This law has been surrounded by controversy ever since it was proposed. Proponents claim that it will stop rich people from abusing the system. Opponents say that it will keep lower income people from being able to “wipe the slate clean” with Chapter 7 and that the credit card companies will benefit the most. Regardless of personal feelings about the law, it has been passed and will go into effect in October 2005. Attorneys and credit counselors are trying to forecast how it will impact their businesses. Stay tuned for how this new legislation will impact everyone involved.


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