A new bankruptcy law took effect in October that will make it harder and more expensive for most families to file for bankruptcy and discharge their debts.

The major result of the new law is that fewer people will be able to file for Chapter 7 Bankruptcy and will be forced to file for Chapter 13 Bankruptcy, instead.

A Chapter 13 bankruptcy is basically a reorganization bankruptcy. Under Chapter 13, you must file a plan with the court showing how you will pay off your debts over a period of three to five years. Once both you and your creditors agree on the repayment plan and the bankruptcy court approves it, both you and your creditors are bound by it.

Now, if you want to file for a Chapter 7 bankruptcy, there will be a qualifying test. Under this two-part test, you will first be required to apply a formula that exempts certain expenses such as food, rent, etc., to see if you can afford to pay 25 percent of your “non-priority unsecured debt” (credit cards, medical bills and the like). Second, your income will be compared to your state’s median income.

If your income is above your state’s median income, and if you can afford to pay 25 percent of your unsecured debt, you will not be allowed to file for a Chapter 7 Bankruptcy.

You may be able to file for a Chapter 7 Bankruptcy if your income falls below your state’s median income but you can pay 25 percent of your unsecured debt. However, if the court believes you would be abusing the system by filing a Chapter 7, you can be required to file for a Chapter 13 Bankruptcy, instead.

If you file a Chapter 7 Bankruptcy today, the court will determine what you can afford to pay based on what you and the court determines are reasonable and necessary living expenses.

Under the new law, the court is required to apply living standards that are derived by the Internal Revenue Service to determine what is reasonable to pay for rent, food, etc., and how much you should then have left over to pay your debts. The IRS regulations are more stringent and if you want to contest them, you will need to ask for a hearing in front of the bankruptcy judge. This can easily mean more time and expense.

When you declare bankruptcy today, your state may allow you to keep all or much of the equity you have in your home. However, the new law places tougher restrictions on this exemption. So before you file, be sure to discuss this with a knowledgeable bankruptcy attorney so that you will know exactly how much of your home’s equity you can expect to protect.

Here’s another tough restriction. Under the new bankruptcy law, you must meet with a credit counselor in the six months before you apply for bankruptcy. You must also attend money management courses – at your expense – before your debts are discharged.

Understand that it takes a couple of weeks to file for bankruptcy. This means that if you want to take advantage of the current law, you should plan on filing at least by the beginning of September of this year.

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