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Means Test, Counseling Requirement Lead a Host of Bankruptcy Changes

By Benny L. Kass
Saturday, April 23, 2005; Page F03

It will no longer be as easy to erase your debts under the bankruptcy law that President Bush signed this week.

The law, which is the most significant overhaul of bankruptcy rules since 1978, has been controversial. It is complex; it will take time for lawyers to study it and understand its implications. Some provisions take effect immediately, others in six months.

President Bush signed the legislation into law on Wednesday surrounded by, from left, Rep. Steve Chabot (R-Ohio), House Speaker J. Dennis Hastert (R-Ill.), Rep. F. James Sensenbrenner Jr. (R-Wis.), Sen. Charles E. Grassley, (R-Iowa) and Sen. Mitch McConnell (R-Ky.). (Larry Downing -- Reuters)

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Estimates are that U.S. consumer debt is approaching $2 trillion. Millions of Americans are facing serious financial difficulties. In 2004, about 1.14 million people filed for Chapter 7 bankruptcy while almost 450,000 filed for Chapter 13 bankruptcy court relief, according to the Administrative Offices of the U.S. Courts.

Here are some of the provisions of the new law that are relevant to homeowners.

Bankruptcy lawyers who represent creditors have long complained that the old law gave judges complete discretion to eliminate consumer debt, no matter the financial situation of the debtor. Perhaps the most important aspect of the new law is a "means test" that must be applied when the bankruptcy judge is deciding whether to discharge consumer debt.

Oversimplified, a consumer in financial trouble can take either of two bankruptcy avenues:

• Under Chapter 7, all unsecured debts are wiped out. If your car and mortgage payments are current and there is no significant equity in your property, you can keep those items.

• Chapter 13 is an interest-free repayment plan, whereby all your debts are consolidated and the consumer makes payment on this debt over a three- to five-year period. While the consumer is in a Chapter 13 plan, his creditors cannot collect directly from him and are legally obligated to honor the plan.

Under the new means test, if the combined gross income of the consumer's family is greater than the median family income in his state, the law may require him to file a Chapter 13 plan and pay off his debts, rather than file for Chapter 7 relief.

Currently, according to the Census Bureau, the median family income in the District is $61,800, in Virginia it is $69,600 and in Maryland it is $82,880. (There's a state-by-state listing on the Web at www.census.gov/hhes/income/4person.html.)

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