Bankruptcy Reform:
Bankruptcy reform acts as a check against debtors misusing the bankruptcy law to get out of making payments. U.S. Bankruptcy laws were originally written to help those citizens who faced financial distress. It was assumed that these well meaning citizens intended to repay debts, but could not due to some misfortune.
Unfortunately, as time progressed and buying on credit became the norm instead of the exception, it became more and more easy for debtors to declare bankruptcy. Simultaneously, it became more and more difficult for creditors to collect payments owed to them.
The Bankruptcy Reform Act corrects this very situation by making it easier for creditors to collect money and more difficult for debtors to evade debt. The Bankruptcy Reform Act attempts to create a need-based bankruptcy system.
The Bankruptcy Abuse Prevention And Consumer Protection Act of 2005
As of October 2005, there will be a new federal bankruptcy law in place. This law is likely to be the most dramatic change brought about by Bankruptcy Reforms since the 1978 Bankruptcy reforms passed by the Congress. While the 1978 bankruptcy reform made it easier for individuals to file for bankruptcy, the new act makes it easier for creditors to collect payment and more difficult for debtors to evade payments. The pendulum has finally swung in favor of the creditors.
The popular Chapter 7 used by most individuals to file for bankruptcy, is going to be much harder for people to elect. Debtors will now be subject to a means test. If the test finds that the debtor exceeds the median income for the State OR has the ability to repay $6,000 of the outstanding unsecured debt over a period of five years, he or she will not be eligible for Chapter 7 bankruptcy.
Of course, this means there is likely to be a surge in the number of Chapter 13 bankruptcies being filed. This is also likely to result in an increased effort on the part of financial institutions in trying to recollect and recover debts. Financial institutions can also look at taking legal action to recover debts since the debtors will no longer be sheltered by law.
The new law also makes the entire bankruptcy filing process a much more tedious and cumbersome process. While the process thus far has been fairly inexpensive and easy, now individuals and corporates filing for bankruptcy can expect to have to go through a large amount of paperwork. This obviously means that the attorney fees are going to increase as well. Thus, filing for bankruptcy will no longer be a ‘cheap’ option.
The new law also requires the debtors to undergo credit counseling six months prior to filing for bankruptcy.
In effect, the new bankruptcy reform aims to ensure that debtors are more responsible for their financial situation. Knowing that filing for bankruptcy is no longer the convenient way out and getting a fresh financial start is not so easy automatically makes it more important for individuals and businesses to stay afloat financially.
It may mean that the credit card companies are going to loose some business but they should more than make up for it with reduction in bad debt.
Thus, bankruptcy reform has finally ensured that filing for bankruptcy is no longer mistaken for social welfare.
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Headlines & Topics Relating to Bankruptcy And Debt:
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