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Bankruptcy is not gone, just forgotten!

February 3, 2006

Contrary to what the credit card industry would have Americans believe, the federal bankruptcy laws are still alive and well, albeit underused. The main change in the law that took effect in October of 2005 (The Bankruptcy Reform and Abuse Prevention Act of 2005 ) is that it forced more people into 5-year Chapter 13 repayment plans than into straight 90-day Chapter 7 liquidations.

That said, you only have to file a Chapter 13 if you make over the median income in your state—a figure that varies by county—and have too much money left over each month. And even if you are over the median income, if you have enough justifiable expenses (typically medical), you can still file a Chapter 7.

People get into financial trouble for all kinds of reasons. Regardless of what the credit industry claims, the big four are still divorce, illness, job loss, and entrepreneurship. Financial irresponsibility accounts for then less 10% of all filings. One unintended consequence of the new law will be to discourage Americans from undertaking the daunting task of starting a small business.

Bankruptcy is not gone, just forgotten by most people who need the help. Sadly, an entire industry has sprung up that is specifically designed to feed on the fact that most people in financial trouble don’t know that there is still protection. Bankruptcy law allows people to protect up to $45,000 in home equity; this provision has not changed under the new law. But, as a partial result of the new law, borderline predatory lenders have sprung up to help part the unaware from their hard-earned home equity.

If you are in debt and seriously considering a refinance to pay off your credit cards, you owe it to yourself and your loved ones to know all your rights. Creditors always protect themselves. Don’t forget that the law protects your interests as well!