The new bankruptcy law goes into effect in October. If you’re on the verge of bankruptcy, the changes are certainly important. But even if you feel financially secure (or you’re living a comfortable existence), don’t be too complacent. Many people who file for bankruptcy were living comfortable middle-class lives until they were hit by a serious medical problem or some other catastrophe. Here’s an overview of the major changes in the new law as they affect individuals.
You could find it harder to erase all your debts.
Under the old law, you could file a Chapter 7 bankruptcy and wipe out virtually all your unsecured debts. Under the new law, you’ll have to pass a means test to qualify for a Chapter 7 bankruptcy.
If your income is too high (generally above your state’s median income), you’ll have to file under Chapter 13. This leaves your debts in place and puts you under a court-approved repayment plan to pay them off. The repayment plan could last as long as five years.
You’ll have to complete a credit-counseling course.
The law requires you to go for credit counseling before you can obtain bankruptcy relief. It must be an approved course, and you’ll have to pay for it.
Recently, the IRS issued warnings to consumers about abusive credit-counseling promoters, and it’s not yet fully clear how the approval process will work.
You’ll probably have to pay more.
The cost of filing is expected to go up because the new law imposes additional procedures and liability on bankruptcy lawyers. They’ll pass these increased costs through to filers.
Your retirement accounts will be protected.
There’s one piece of good news in the new law. It formalizes protection for your retirement savings in IRAs, 401(k) plans, and other qualified retirement plans.
In general, your retirement savings will be out of reach of your creditors. A limit of $1 million applies to some IRAs.
The law also protects tax-advantaged education savings. Amounts in Section 529 plans and education IRAs are also protected, subject to some limits.
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