The latest bankruptcy law, S.256 is now in effect. This law has taken a lot of heat for the generous way in which it benefits the credit card companies at the expense of the consumer.
Personal bankruptcy filings are primarily filed as either Chapter 7 or Chapter 13. Chapter 7 is well known for providing an individual with a “fresh start.” The assets of the individual are liquidated and the money is given to the creditors. Most of the remaining debts are canceled. There are some debts that are not subject to cancellation such as child support payments and tax liabilities. Credit card companies have historically complained that they are unfairly hit the hardest by Chapter 7 bankruptcies because they generally walk away without a penny.
Chapter 13 is well known for providing an individual with a reorganization plan. Some debts are canceled but most debts are subject to a repayment plan established by the court. This does not allow for a fresh start which makes it more difficult for someone to overcome their financial situation.
Under S.256, individuals will find it more difficult to qualify for Chapter 7 bankruptcy protection. Even those that do qualify will find it now less helpful in creating a clean slate. A few of the most significant changes are:
- Income Test – This is a two-part income test which uses a formula to determine if you will qualify for Chapter 7 protection. The reality is that fewer people are going to qualify as a result of this test.
- Living Standards – The courts will determine what you can afford to pay by applying living standards generated from the IRS. As you can imagine, these standards are very strict.
- Homestead Exemption – Stricter restrictions will be applied which will cause more people to lose their home as a result of bankruptcy.
- Lawyer Liability – The bankruptcy attorney is going to be held accountable for the accuracy of the facts surrounding the bankruptcy. If violations occur, the attorney will be subject to fees and fines. The result is that some attorneys may cease representing people for bankruptcy which will make it harder to find an attorney. Attorneys who do continue to represent clients will most likely increase their fees.
- Credit Counseling and Money Management Courses – An individual must meet with a credit counselor during the six month period prior to filing for bankruptcy. Also, before debts are discharged, an individual must attend a money management class.
The biggest controversy with this new law is that it does not take into consideration the individual's circumstances. Some people simply encounter hard times through no fault of their own and find it impossible to overcome their situation. For instance, a parent with a very sick child who has to be hospitalized for a period of time may find themselves unable to put food on the table much less pay their bills. They not only have a large stack of medical bills but they may have been out of work for a while to care for the sick child. The new law does not show preferential treatment to someone in this situation. The law treats this individual no different than the person who simply overindulged at the mall and ran up their credit card bills and now cannot pay the monthly payments.
The credit card companies argue that an individual's circumstances should not matter. They feel that if they are the ones left holding the unpaid bill, then circumstances are irrelevant. They just want their money. But, who among us feels that the credit card companies have been unfairly treated? They have historically used many of their own tricks in order to get more money out of the consumer. It would only seem fair then that S.256 be followed by an Act intended to end credit card company trickery and level the playing field for the consumer. However, until such time occurs, we must familiarize ourselves with money management and debt reduction strategies so that we can place ourselves in a better position to weather any future financial storms.
Other articles which you might find interesting:
How to Overcome the Deception Used by Credit Card Companies
Getting Out of Debt
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