By Dee Dee Sung
Fallen on hard times
Q. I've come upon hard times due to a recent job loss and have been very stressed about how to meet my financial obligations. I have since started another job, but it's been almost impossible to play catch up and make all my payments each month. Because of this, I'm considering declaring bankruptcy. I heard that there's a new law in effect. Could you clarify the details?
A. I can understand how stressed you must feel as financial strain can impact every area of our lives. You're certainly not alone even though you may feel that way. In fact, statistics show the number of bankruptcies filed in 2004 alone, exceeded the total number filed in the entire decade of the 1960s.
The new law, known as The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, went into effect on Oct. 17 and is designed to restrict consumer abuse of bankruptcy filings. Essentially, there are two types of filings: Chapter 7 which is a complete liquidation of debts and, Chapter 13 which requires a consumer to pay back over time their secured debts and as much of their unsecured debt as possible.
The most significant change in the law is the implementation of a "Means Test" which will be used to determine if the consumer is eligible to file for Chapter 7 or 13. It will address the following points:
* Income – the average of your income for the past 6 months will be used to determine if it falls above or below your state's median income. If it falls below, you would be eligible to file Chapter 7.
* Expenses – if it's found that you have the ability to repay $100 per month for the next 5 years (after deducting from your monthly income, mortgage/rent payment, car payment, past due taxes and child support if applicable) you would not be eligible to file for Chapter 7.
In addition to the means test, your assets/collateral will be assessed at a higher value, which means that your creditors can potentially get more from you. Overall, filing for bankruptcy protection will be a more complex process as well as more costly. Debtors will be required to enroll in an approved credit counseling program within 6 months of the filing date and with regards to bankruptcy attorneys, the law will require more paperwork and new accountability standards which will undoubtedly create higher fees to be charged. Some estimates indicate that legal fees could as much as double once the new law goes into effect.
I recommend that you consult with a bankruptcy attorney so that you are aware of all that is involved in filing for bankruptcy. A Chapter 7 bankruptcy will remain on your credit report for 10 years. You will be able to reestablish credit before this period; however, it could well be at higher interest rates. With regards to the negative effect that it will have on your credit scores, it will diminish over time as you establish new credit and make timely repayments. For more information on bankruptcy, visit the American Bankruptcy Institute's website at www.abiworld.org. There is a section called the Consumer Education Center which is very informative. Also, be sure that you do your homework as to other debt relief options available to you or visit www.debtfreediva.com to learn more. These include debt consolidation, debt management and debt negotiation. When you are aware of your choices, you can and will make an informed decision.
Metro Detroit speaker, author and syndicated radio personality Dee Dee Sung is the founder and creative director of The Debt Free Diva with a mission to educate, entertain and inspire people in reinventing their relationship to money.
