Trying to Beat the Clock

There’s a run on the courthouse with 10,000 Americans a day seeking bankruptcy protection before a tough new bankruptcy code kicks in at 12:01 a.m. Monday, Oct. 17.

“It’s very, very late to file if you want to beat the clock, given the amount of paperwork involved and the fact most bankruptcy attorneys are busy handling the record 1.6 million personal bankruptcies filed the last year, ” says University of New Mexico law professor Nathalie Martin, author of “The New Bankruptcy Law and You.”

One possibility, Martin says, is to file a two-page bankruptcy petition plus a typed list of your creditors before Oct. 17, with the remaining paperwork due within 14 days.

Otherwise, you’re looking at tough new conditions and added costs if you delay. Here’s what will change:

_ Tighter income limits: People whose income exceeds their state’s median income the six months before filing may not be able to file Chapter 7 bankruptcy, which lets consumers shed their debts and get a fresh start.

If the bankruptcy judge decides you can pay at least $100 a month toward your debts, you must file under Chapter 13 and repay creditors under a court-approved budget.

But 85 percent of people who file for bankruptcy earn less than their state’s median income so they won’t face the Chapter 13 “means test” and creditor-repayment requirements, American Bankruptcy Institute executive director Sam Gerdano says.

The bankruptcy code’s new rules could force better-off consumers into Chapter 13 if they suffer a sudden crisis such as job loss, death or disability, the major causes of filing for bankruptcy protection, says Harvard Law School bankruptcy expert Elizabeth Warren.

With many of the 1 million Gulf Coast residents displaced by Katrina and Rita likely to file bankruptcy, and with extensive documentation of income sources required for bankruptcy filing lost or destroyed, congressional Democrats propose relaxing the law for hurricane victims. But Republicans who control Congress won’t reopen it and say bankruptcy courts can consider “special circumstances” such as hurricanes case-by-case.

State-by-state median income figures for 2004 are posted at under “Income and Wealth.”

_ New counseling requirements: Consumers considering bankruptcy will have to undergo credit counseling within six months before they file and take a debtor education course before they exit bankruptcy protection.

Fees for these courses haven’t been set yet by the Executive Office of U.S. Trustees, which administers bankruptcy filings, and local trustees and bankruptcy judges can waive payment for people who can prove they cannot pay.

One exception: The trustees’ office has waived credit counseling for Katrina victims in Louisiana and South Mississippi.

However, the waiver doesn’t apply to Katrina victims who relocate elsewhere: For them and everyone else, the trustees’ office has approved 41 credit-counseling firms in advance of the law change. Its list is posted online at

_ More bankruptcy-proof loans. Even if your income is too low to meet “means-tested” Chapter 13 debt repayment, more of your borrowing will require repayment.

Current law makes it next-to-impossible to discharge student loans from the government or non-profit organizations _ even if you file for Chapter 7 to wipe out your debts_ but the new law will extend student loan repayment requirements to borrowing from banks and other private lenders, says Martin.

Buy $500 worth of luxury goods through a single creditor within 90 days of filing bankruptcy, and expect to repay the money. Take out $700 in cash advances within 70 days of filing, and you repay it, too.

Debtors who must file for Chapter 13 face new rules on car loans: Instead of repaying the current value of a car, as current law allows, you repay the full amount of the outstanding loan starting Oct. 17.

_ More costly filing: The current fee to file Chapter 7 is $209, or $194 for Chapter 13. As of Oct. 17, Chapter 7 filing will cost $274, or $189 for Chapter 13, and these fees don’t include credit counseling and debt management course costs or administrative fees that some bankruptcy courts charge.

Legal fees that typically run $1,000 for a simple bankruptcy likely will rise, too, thanks to added paperwork and a new requirement that makes bankruptcy lawyers liable for verifying clients’ income claims and valuing their property: A bankruptcy institute poll finds 57 percent of members expect their bills to double, with 22 percent foreseeing smaller increases.

Texas bankruptcy lawyer John Penn suggests consumers get a pre-filing letter in which their lawyer spells out fees, expenses, deadlines and the like and stating situations such as creditor challenges that may increase billing.

_ Homestead: After Oct. 17, the new law sets a federal homestead limit letting debtors shield $125,000 in home equity if the house was bought within 40 months of filing bankruptcy, although homeowners will face stingier limits if they live in states with stricter homestead rules. Otherwise, people can still protect their house against creditors even in Chapter 7 bankruptcy liquidation if they live in one of five states that allow unlimited “homestead exemptions,” however pricy the house. However, the federal law’s 40-month limit will curb the open-ended homestead exemption that made Texas and Florida magnets for technically bankrupt millionaires to hide in their mansions.

_ Asset-protection trusts. The new law won’t close this “millionaire’s loophole” either: It lets wealthy people protect substantial assets from creditors after bankruptcy. Long set up offshore to keep their money out of reach of domestic creditors, asset-protection trusts have been legalized by Delaware and other states for people who live anywhere in the nation.

_ Retirement accounts. Up to $1 million in Individual Retirement Accounts would be shielded unless your state sets different IRA rules for bankrupt debtors, financial planner Michael Kitces of Columbia, Md., advises. The change limits a recent Supreme Court ruling, which said IRAs are entitled to the same full protection from creditors as pensions and 401(k)-style retirement savings plans.

_ Credit cards: Bill Hardekopf, who monitors the industry for, reports a drop in approval of new credit card applications in advance of the Oct. 17 effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act

However, it’s a rules change by the Federal Reserve and other lending regulators that takes effect next January that has credit-card issuers raising their minimum payment. The new rule aims to make consumers lower their card balances by having lenders set minimum payments at levels that cover interest, fees and some outstanding balance.

Some lenders already have already made the change; others will follow, but the prospect of higher minimum credit-card payments is something consumers considering bankruptcy should face now, financial planners advise.

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(Contact Mary Deibel at DeibelM(at)