Impending Bankruptcy Changes Push Up Filings

A major overhaul of the bankruptcy law is prompting more people to file for protection now to avoid going through a more difficult and expensive procedure in the fall.

Bankruptcy filings in March jumped nearly 60 percent from February, according to Cardweb.com, which tracks the credit and debit card industries. Attorneys who specialize in bankruptcy law say the increase is directly related to the new law, which takes effect Oct. 17.

One of the biggest changes is that fewer people will qualify for the most lenient form of bankruptcy, Chapter 7, which allows debtors to walk away from their financial obligations. A means test will be used to determine if consumers can file for Chapter 7. People with income above their state's median income who can pay at least $6,000 over five years - $100 a month - would be forced into a Chapter 13 bankruptcy, which requires a repayment plan.

Other changes include a requirement for debtors to get credit counseling within six months before filing bankruptcy and to complete a financial management course before debts can be eliminated.

Consumers who are in tough financial straits, worried they will be shut out of Chapter 7, are trying to get protection under that status before the new law takes effect, the Chicago Tribune reported.

"There is no question that it will be more difficult to file," said Denver attorney Lee Kutner. "It's not a myth. It's a reality, especially for the middle class." He also told the Rocky Mountain News: "From what I'm seeing, anybody who has been thinking about it, or has any need for bankruptcy relief, is filing now."

Some experts fear that panicky consumers may jump into bankruptcy before looking at every other option. One legal solutions provider says that filing for bankruptcy is best only when both long- and short-term financial ailments are cured and a big-picture “treatment plan” is put in place. Bankruptcy should be the last resort.

"Doing nothing with your core legal and financial foundations while wading through bankruptcy is almost as bad as putting a Band-Aid to stop a gushing geyser," said Claire Parins, legal content editor for Socrates Media, which offers do-it-yourself legal guides. "While throngs of consumers will rush to bankruptcy court before September 30, smart filers will also have plans in place to repair credit so they don't have to go through the process again."

Travis Plunkett, spokesman for the Consumer Federation of America, told the Tribune: "Never ever make a hasty decision about any kind of debt assistance, whether bankruptcy or credit counseling. What kind of a person is in a hurry to destroy their credit for the next 10 years?"

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