Q&A About the Bankruptcy Reform Act

Author: Mary Ann Milbourn
Publication: MyrtleBeachOnline.com (Knight Ridder)
Date: Apr. 16, 2005

Bankruptcy is a major financial step for people, and under the bankruptcy bill passed by the House on Thursday, it will often require jumping over some hurdles, too. Here are some of the basics of the legislation, which the president is expected to sign:

Question | What is the biggest change in the law?

Answer | "The big difference in the new legislation is it's going to vastly limit the number of Chapter 7 filings vs. Chapter 13," said Evan Smiley, a Costa Mesa, Calif., bankruptcy lawyer.

The change involves a so-called means test that will make Chapter 7 filings unavailable for most people whose incomes exceed their states' median incomes. Anyone whose income is above the median, earns a salary and has $100 left over every month after paying for his or her basic needs must file under Chapter 13.

Under this chapter, the court sets up a monthly repayment plan that the debtor must follow for five years. Currently, most people file under Chapter 7, which doesn't require repayment and under which most of the unsecured debt, such as credit cards and medical bills, is erased. People who make less than the median income could still file for Chapter 7.

Question | What other new requirements will filers face?

Answer | Consumers also will be required to get credit counseling from "an approved nonprofit budget and credit-counseling agency" for up to six months before filing for bankruptcy. Jim Frannea, president of Consumer Credit Counseling Service of Orange County, Calif., said it's unclear exactly what this will entail, how much it will cost and whether credit-counseling services will be reimbursed for their time.

Debtors also will be required to take a financial-education course within 18 months after filing and before their debt can be discharged. No standards have been established for what the educational program will involve or how much it will cost.

Bankruptcy trustees are expected to determine the rules for the credit-counseling programs.

Question | I understand that the new rules don't take effect for six months. Should I file now?

Answer | Experts are expecting a rush to the bankruptcy courts as word about the new rules gets out. Many are advising clients to think about filing before the new law takes effect.

"If they are close to the edge [of bankruptcy], they should be looking to do it [early]," said Joel Framson, a Los Angeles CPA and chairman of the personal financial-planning executive committee of the American Institute of Certified Financial Planners. "Afterward, it's going to be much more difficult." People who have trouble paying their bills now but aren't in enough trouble to file bankruptcy should view the law as a wake-up call, he said.

"They should get some education on financial literacy to get them on the right path."

Question | Will it cost more to go through bankruptcy?

Answer | Most experts expect costs to go up significantly. With all the additional paperwork, oversight and credit counseling, experts say, costs could double.

Question | If I file under Chapter 13 rather than Chapter 7, will I lose my house?

Answer | One of the main differences between Chapter 7 and Chapter 13 is how your house is treated. Under Chapter 7, favored by most bankruptcy filers now, your house can be sold to pay off your debts. Under Chapter 13, you are allowed to keep your house.

Question | I'm a renter and I owe back rent. Can I be evicted if I file for bankruptcy?

Answer | The National Multi Housing Council and National Apartment Association say that, under the new law, landlords who have won eviction judgments against tenants will be allowed to proceed with the evictions. Current law allows an automatic stay of eviction while bankruptcy proceedings are under way.

Question | How does law the change affect alimony and child support?

Answer | Families have a better chance of getting support payments under the new law. The law makes child support and alimony first priority after the bankruptcy trustee's administrative costs are paid.