Bankruptcy Laws Changed in 2005 - How can these changes effect your credit?

In 2005, after eight years of intense lobbying, the country’s banks and credit card companies, along with their industry trade representatives, finally saw a piece of legislation dear to their hearts signed into law by President George W. Bush. The bill, somewhat cynically called the Bankruptcy Abuse Prevention and Consumer Protection Act, was supported by the aforementioned groups in order to weed out debtors who were abusing the bankruptcy system by “deliberately running up debt and then walking away from their obligations.” The fact that most bankruptcies are non-voluntary and due to unfortunate circumstances like illness or the loss of a job didn’t seem to matter to the industry’s friends in Congress.

The act made several noteworthy changes to the United States Bankruptcy Code. Most significant was how the law made it more difficult for people to file for Chapter 7, or straight bankruptcy protection, under which certain debts they incurred can be discharged without the need to have them paid off completely, or in some cases, at all, if they are considered exempt debts. Before implementation of the act, debtors at all income levels could file for Chapter 7. Under the new law, a debtor’s income must be below the median income of his or her home state, and if not, the debtor is subject to a means test, wherein a bankruptcy court decides if a debtor is eligible to file for Chapter 7.

The result of the law was an immediate decrease in Chapter 7 filings and an uptick in Chapter 13, or consolidation bankruptcy petitions, which requires debtors to pay back most of their debts over a five-year period. The boon for the banks is obvious – more people who cannot afford to pay their debts will be forced to continue to try and juggle their obligations, likely getting deeper into debt while attempting to dig themselves out! Remember – credit card companies make their money by charging high interest rates on unpaid balances, and the concurrent penalties and late fees for those who cannot pay their balances in full each month.

Regardless of which type of bankruptcy is filed, the damage to someone’s credit score is severe and long-lasting. Filing Chapter 7 will stay on your credit report for up to ten years, and for Chapter 13, seven. And because it negatively impacts your credit score, filing personal bankruptcy may result in long-term consequences such as higher interest rates for any new loans on cars and other big-ticket purchases, higher premiums on your insurance and higher rates for home mortgages.

Courtesy of:

Kat Pilnick Debt.org – 800-246-5346

Consumer Financial Advocate 
Member of The International Association of Professional Debt Arbitrators

Information Provided by Donna Antonucci

Prudential Castle Point Realty

201-240-6832

donna@donnaantonucci.com

www.hobokenrealestatemonitor.com

www.hudsonrealestatemonitor.com

www.donnaantonucci.com