Debt Consolidation and Credit Card Counseling

New bankruptcy law features the most sweeping changes in decades

The Bankruptcy Abuse and Consumer Protection Act, passed into law with the full support of both houses of Congress, takes effect in October 2005. The legislation, signed into law by President Bush last April, promises the greatest changes in Federal bankruptcy law in a generation. The law promises consumer “protection”, but it really does far more for the lending industry than it does for consumers. Here, in a nutshell, is a list of five things every consumer should know about the new law.

Chapter 7 filings will nearly disappear - The old law allows most consumers to file for bankruptcy under Chapter 7 of the Federal code, which allows the courts to wipe out most consumer debts. This has worked well in the past, allowing debtors to start over again, but credit card companies often had to write off the losses. Not any more. The new law requires a means test, which will compare the income of the debtor to the median income of his or her state. If the debtor’s income is above that level, he or she will have to file under the more stringent Chapter 13, which requires partial repayment of debt.

Lawyer trouble, Part I - Chapter 13 filings are much more complicated than Chapter 7 filings, so most debtors will need to hire an attorney. Many bankruptcy lawyers are already reporting huge increases in business; some are turning potential customers away as they just can’t handle more cases. If you need an attorney, and you will, start calling now or be prepared to get in line.

Lawyer trouble, Part II - The new legislation holds lawyers liable for the information they file in court on behalf of their clients. If you lie in your documentation, your lawyer is responsible for that and could be fined. This has scared many attorneys away from bankruptcy practice, and those who provided free, or pro bono, legal assistance will soon stop offering debt services altogether. Most attorneys who offer debt-related services will raise their fees to cover the additional liability, so be prepared to pay more once the new law takes effect.

Credit counseling will be mandatory - Yes, the Government is requiring credit counseling as a prerequisite to a debt relief filing. The details haven’t been settled yet, and no one knows which agencies will qualify or what the requirements will be for either the agency or the client. The Trustees office is working on it, but as of yet, there are no details. Expect long lines at the counselors’ offices.

Be prepared to pay more bills - Some types of debt, such as taxes or student loans, cannot be wiped out by a Chapter 7 or 13 filing. The list of debts that must be repaid will grow larger under the new law and it includes debts incurred through identity theft.

These are five important things that every consumer should know about the new legislation. If you think you cannot repay your debts and seeking debt relief is inevitable, don’t wait. Call an attorney now, or be prepared to face the stampede when the new law takes effect soon.

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