The new bankruptcy law 2005 should be understood by all consumers – especially those who are in severe debt. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256) has raised many concerns among consumers and professional institutions alike. Let’s go through the law in order to understand what it means for all consumers.
Probably the most important and troubling aspect of the bankruptcy law 2005 is the “means test”. This is somewhat inflexible. The test is based on income and expenses which have been determined by the IRS. So in many ways it’s a “one-size-fits-all" test. What it means in practice is this: if you are a middle-income debtor and you have $100 per month more than the means standard then you must submit a 60 month repayment plan, rather than file Chapter 7 bankruptcy.
Some of the changes in the bankruptcy law 2005 are of benefit to the consumer, others will help creditors and others may not be all that positive. An important aspect of the new law is that the Federal Reserve Board will be paying attention to the issue of credit card debt created during the college years and bankruptcy. This is an extremely important correlation.
It also addresses the fact that creditors cannot cancel their cards and must display the amount of time in which he or she will repay the debt. New bank regulation procedures will try to determine whether credit card companies are issuing cards indiscriminately - this is a positive feature of the bankruptcy law 2005.
What about required counseling for debtors? Yes, the bankruptcy law 2005 requires that debtors take a class in fiscal management. Obviously this will help those who manage their finances poorly but might not be suitable for those who have filed for bankruptcy due to other reasons – job loss, illness or divorce.
Section 106 of the new bankruptcy law 2005 makes provision for mandatory credit counseling. Debtors are required to undergo individual counseling. This counseling must be given by a credit counseling agency. The counseling must be done within a period of 180 days before you file. This might sound simple but debtors need to avoid credit counseling scams and ensure that they are getting adequate counseling.
The bankruptcy law 2005 also sees all charges on cards within three months of bankruptcy being paid by the consumer. This means no exotic and expensive vacations before filing – just as it should be!
How does the bankruptcy law 2005 affect child support? Since court procedures have not always been effective in this regard the new law could help those struggling to get alimony from their spouses. The new law sees payment of these obligations as a high priority.
What about IRA's? The bankruptcy law 2005 now provides protection for the money in an education IRA. It also caps what can be shielded from creditors in a Roth or other IRA.
It is in the best interests of all consumers to avoid debt and make sure that they understand the ramifications of the bankruptcy law 2005. This will help them to avoid making costly mistakes that could negatively impact their financial future.
