On October 17th, 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect. Supporters of the bill, such as credit card companies, say that many Americans were abusing the old bankruptcy laws, often spending far beyond their means with no thought of consequence. Opponents of the bill say that it will hurt those who can least afford it: low income working people, the elderly, and those who suddenly lost their jobs.

I must first mention that the new law does a few provisions included in it that many people could consider to be good, overall. One is that credit card companies must print on your statement how long it would take you to pay off your debt if you keep making the minimum payments. When some people see that it will currently take them over 30 years to pay off the existing debt on a single card (even if no further purchases are made), they may be more likely to pay a little more toward the principal than charging more things on their credit card. Child support will also be placed as a much higher priority on the list of debtors, making it more difficult for deadbeat fathers to avoid. Credit counseling will be a requirement before you file for bankruptcy, to make sure informal payment arrangements would not be a better alternative. And before your debts are discharged, you must attend a money management class. Although this can be helpful, it will be paid at your own expense.

The new bankruptcy law makes it more difficult to file for a Chapter 7 bankruptcy, and instead forces more consumers into a Chapter 13. In a Chapter 7, your assets (other than those exempted by your state) are liquidated and given to your creditors. Most of your remaining debts are then cancelled, giving you a fresh start. Since many Chapter 7 bankruptcy filers don’t have assets that qualify for liquidation, credit card companies and other creditors often get nothing. In 2004, over 1.1 million people filed for a Chapter 7, accounting for nearly 75% of all consumer (non-business) bankruptcies.

In a Chapter 13 Bankruptcy, you are put into a repayment plan of up to 5 years. Like with the old rules, those in Chapter 13 need to devote 100% of their disposable income to the repayment plan. But now, they have to calculate the disposable income using IRS guidelines, when the actual expenses are often more. To make matters worse, these allowed amounts are not subtracted from the person’s actual income each month, but from the average income from the 6 months prior to filing. This means that many debtors may have to pay much more than their actual disposable income, and may lead to many Chapter 13 plans failing.

A two part means test measures your income to determine which chapter you will be eligible for. You won’t be allowed to file for Chapter 7 if your income is above the state’s median, and you can afford to pay 25% of your unsecured debt, but you may be able to file for Chapter 13. If your income is below the state’s median, but you can afford to pay 25% of your unsecured debt, you may be able to file for Chapter 7, but the court can require you to file for a Chapter 13 if it believes you are abusing the system.

Under the old bankruptcy law, those filing for a Chapter 7 could value their property at what they could sell it for at an auction. This meant most of what they owned would often fall within the exempt property categories in most states. Under the new law, property is valued at what it would cost to replace it from a retail vendor. This is certain to increase the value of property, and therefore more debtors may have their property taken from them by trustees.

Under the new law, if the information about the client’s case is found to be inaccurate, the bankruptcy attorney is liable, and subject to numerous fines. This means it will be harder to find an attorney willing to do all of the extra work to verify each figure, and the added length of time needed for them to do the work will mean many clients will be paying double of what they would have had to under the old law.

While the new law is supposed to help all parties involved, it clearly helps the credit card companies far more than anyone. The best measure against it is to avoid bankruptcy altogether. While this isn’t always possible, it many times can be done with proper planning, or discussing alternative payment arrangements with your creditors.