Chapter 7 vs. Chapter 13 - What The New Bankruptcy Laws Mean To You

Continued...

I am totally in favor of financial literacy programs and credit counseling, I think that if we had more discussions about money, credit and debt in schools, churches and within our families there would be far fewer cases of such out-of-control spending and gross lack of savings in the first place.

As a former debt strapped college student who contemplated filing bankruptcy - I was doing it for all the wrong reasons, and had I been able to scrape up the money to do it I would have but the lessons I needed to learn about being financially responsbile would not have been learned or lasting. Many years later, I'm grateful that I didn't do it and I now understand how companies have to absorb bad and irresponsible debt which inevitably cause interest rate and price increases; in my case the new bankruptcy laws would have been fair.

However, through my workshops and seminars I have been working with individuals who are not living lavish lifestyles, but are living with no (or very little) breathing room in their income, buying basic necessities on credit, and finding themselves in money trouble once they lose the ability to earn overtime pay or worse - their jobs.

All it takes is one mis-step or if they have a significant and unexpected expense, such as a medical bill or a family emergency, these are the people and families that will be hurt the most by the new laws.

Let's face it, things don't seem as cozy for the middle class as they once did, there was a time (and it was less than 10 years ago) when a middle class family could live comfortably on one income and very well on two incomes.

With housing prices going through the roof, corporate mergers, layoffs and outsourcing, the cost of education increasing, the overall cost of living rising; not to mention the recent blow to our wallets in the wake of skyrocketing gas and fuel bills and it's enough to make anyone scream "Uncle Sam please help!" or at least "uncle."

This country runs mainly on the persistence, tenacity and resources of "middle-America" who seems to be hurting the most and has the most to loose by the change in the bankruptcy laws.

While there is still a bit of a stigma (but not nearly as much as there used to be) that comes with filing personal bankruptcy, individuals have been filing in record numbers over the last 12 to 16 months.

Throughout the country there was a notable surge in the bankruptcy filings in the months leading up to the changes. David Fickel, a clerk in charge of the Toledo, Ohio bankruptcy court contends the area's economy is more to blame for the increasing bankruptcies than the reformed laws.

As reported in the "Blade," a local paper in Toledo, Mr. Fickel said, "Filings have jumped dramatically in the past year, with each month of 2005 having more cases than the same month in 2004. Cases so far this year are up 37 percent from the year before. More than 90 percent are filers who are seeking to erase their debts, not to repay them."

So what happens now to individuals who are looking to erase their debts rather than repay them? Is it too late? How do the new laws support or hinder them in their efforts to "wipe the slate clean?"

Here' what you need to know about Chapter 7 vs. Chapter 13 bankruptcy and what the new laws mean to you.

United States Bankruptcy Courts (www.uscourts.gov) says, "The primary purposes of the law of bankruptcy are"

To give an honest debtor a "fresh start" in life by relieving the debtor of most debts, and

To repay creditors in an orderly manner to the extent that the debtor has property available for payment"

Under the new laws, the first primary purpose, "To give an honest debtor a "fresh start" in life by relieving the debtor of most debts", is made more difficult due to the fact that currently more than 70 percent of individuals who file for bankruptcy file under Chapter 7 which historically discharged most of a filers unsecured debt.

Furthermore, if the second primary purpose of filing bankruptcy is, "to repay creditors in an orderly manner to the extent that the debtor has property available for payment" then according to the Associate Press, "The law has provisions likely to force more debtors into Chapter 13 bankruptcy programs, which require them to pay creditors on a court-approved schedule."

But according to banking consultant Bert Ely of Alexandria, Va., "A lot of folks just don't have the income to handle repayment plans, or they'll start out under a plan and a few years down the road, they'll get into some trouble and not be able to complete it as envisioned."

It is predicted that the new bankruptcy laws that goes into effect today will be instrumental in seeing a decline in Chapter 7 bankruptcy filings and filings overall. Some argue that this is a "no win" law that will have devastating effects on the already struggling middle class.

Unfortunately, only time will tell.

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