The New Bankruptcy Laws - And We Hope You Don't Go BK

Of course, investing in the stock market is difficult if you're debts are so monumental that you're considering bankruptcy.

And if you're facing a mountain of debt, bankruptcy still is undoubtedly a situation to avoid.

Even so, some of the greatest businessmen in history have survived it. Take H. J. Heinz. His creditors forced him into bankruptcy. Walt Disney suffered bankruptcy along with a nervous breakdown. And Milton Hershey came out of bankruptcy to dominate the chocolate industry.

But why take a risk? Knowing the ins and outs of bankruptcy is the first, all-important step to avoiding it in the first place. And the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S.256), which goes into effect in 2005, is a good place to start. If you are an individual or even a small business owner facing debt issues you need to know how the new laws may help or hinder your business venture.

The Basics:
Here are the nuts and bolts - by the numbers. The Internal Revenue Service's "Chapter 7" is commonly called straight bankruptcy. Your assets are sold (liquidated) to repay your debt. There are some exemptions that enable you to keep your primary residence or a vehicle so you can get to work. Anything that is not repaid is cancelled. Often unsecured debt, which includes credit card debt, is written off entirely when you file through Chapter 7.

"Chapter 13" is personal reorganization or repayment and "Chapter 11" is business reorganization. In this situation, you, the court and your creditors work out an agreement and you repay a portion of your debt over five years. You stand a better of chance of getting credit in the future if you go this route instead of full Chapter 7 bankruptcy.

Under the new law it will be harder for people to file Chapter 7, forcing more people to file Chapter 13. The overall effect is to get folks to take responsibility for their financial actions when they overspend with credit cards and abuse the system. Although, the main reasons people file for bankruptcy is medical emergencies resulting in high medical bills that health insurance doesn't cover, divorce, or a job loss.

But many people use personal credit to run their financial lives. Small business owners are particularly susceptible to abusing credit cards. According to the National Association of Consumer Bankruptcy Attorneys it's estimated that 20 percent of consumer bankruptcy is actually small business bankruptcy.

According to the American Bankruptcy Institute the following is a summary of changes to the old rules and new key changes that you should be prepared for in assessing bankruptcy risk.

The biggest change is that as of October 2005, you must seek assistance from a credit-counseling agency six months before you file for bankruptcy. You need to show you are making a good faith effort to sort out your financial woes. And you must attend a money management course. There are exceptions in emergency situations but that is up to the court to decide.

Under the old rules the court had wide latitude to decide what cases qualified for Chapter 7 protection. Now everyone is subject to a "means" test -- meaning your ability to repay some of your debt. If your income is greater than the median for your state the court can deny your request for bankruptcy. Your basic living expenses are taken into consideration along with your ability to repay at least 25 percent of your unsecured debt including credit card debt. If your income is above your state median and you can re-pay 25 percent of your debt - you can't file Chapter 7 but you can try to file Chapter 13. For example, if your income is below median for your state but you can pay the 25 percent then the state will decide if you can file Chapter 13 or Chapter 7.

Starting in October 2005, attorneys, whether acting as debt relief agencies or bankruptcy attorneys, can be held liable for any inaccurate information you submit when filing for bankruptcy. They must verify your information, disclose their fees, give you a written contract, and inform you that you are not legally required to hire an attorney to file bankruptcy. They cannot advise you to incur more debt in order to qualify for bankruptcy. In this respect attorneys may start charging more for their services and be less willing to go to bat for you unless your circumstances are truly dire.

If you fail to provide all the necessary forms within 45 days after filing bankruptcy your case will be automatically dismissed. This includes proof that you attended a credit counseling service, along with financial paperwork, such as tax return information, a statement of net income, and evidence of employment.

Things to consider when deciding if Bankruptcy is an Option:
What to consider first? For starters, there is no such thing as free rent. For instance:

Bankruptcy does not prevent a landlord from evicting you if you fail to pay your rent.
Likewise, you can't bail on child or other domestic support obligations, and if you do you will be in default and your bankruptcy can be reversed.
If you commit tax fraud any debt that you owe the taxman will not be forgiven by bankruptcy.
In the past if you had a car loan you only had to pay back what the car would currently be worth. Under the new law you must pay the full amount of the loan whether the car is worth less or not.
In the past you were not able to bail out on paying Uncle Sam back for your student loan if you filed for bankruptcy. Under the new Act you still have to pay Uncle Sam and you cannot file bankruptcy against any student loan debt whether it came from a non-government agency or a for-profit company that offers student loan repayment plans.

The Aftermath
Once you file bankruptcy be prepared to live with it on your credit report for 10 years. The damage to your credit can affect your ability to get approved for a home loan, a car loan or even another business loan. In most cases the best defense is a good offense, review these tips on how to avoid bankruptcy and how to re-build your credit if you do have to file:

Work within a budget and stick to it, don't live above your means.
If you run a small business be a dedicated bean counter, keep track of your expenses weekly so you can anticipate problems well in advance.
Try to pay more than the minimum payment on credit card debt each month or better yet charge only what you can pay off in full each month.
If you find yourself swimming in debt seek help sooner than later or borrow from your savings or family if possible, or contact the creditors directly to work out a payment plan.
Check with the Better Business Bureau before signing up with a debt relief agency that promises to erase debt at a low-cost, don't expect any easy way out. One non-profit agency with a good reputation is Consumer Credit Counseling Services, they can teach you how to manage your debt and make payment arrangements with creditors.

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