The new bankruptcy law and you
What you should know about the law, which will make it tougher for consumers to clear their debts.
October 17, 2005: 12:17 PM EDT
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) - A new bankruptcy law goes into effect today, making it harder for consumers to prove that they should be allowed to clear their debts in what's known as a "fresh start" -- or Chapter 7 -- bankruptcy.

And those who file will be paying much higher fees to bankruptcy attorneys, who are expected to raise their rates by as much as 100 percent. That's to account for the increased liability the new law imposes on them, which will mean more time verifying and filing client documents.

Consumers who seek to file bankruptcy in the next couple of months may also experience delays at the bankruptcy courts, which have been overrun in the past four weeks as debtors scrambled to file under the less stringent requirements of the old law.

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Based on preliminary data for the week ending Oct. 15, researchers at Lundquist Consulting estimate that there will be more than 200,000 personal bankruptcy filings. That's almost triple the number of filings in the week ending Oct. 1, which itself was a record high.

Key changes

Here's a rundown of the key changes for consumers under the new bankruptcy law:

Chapter 7 vs. Chapter 13: In a Chapter 7 bankruptcy, your assets (minus those exempted by your state) are liquidated and given to creditors, and many of your remaining debts are cancelled, giving you what's known as a "fresh start." In 2004, over 1.1 million people filed for Chapter 7, accounting for roughly 72 percent of non-business bankruptcies.

Since many Chapter 7 filers don't have assets that qualify for liquidation, credit card companies and other creditors sometimes get nothing.

In a Chapter 13 bankruptcy, you're put on a repayment plan of up to five years. Any debts not addressed by the repayment plan don't have to be paid. Last year, there were 445,574 Chapter 13 filings.

Under the new law, fewer people will be allowed to file under Chapter 7; more will be forced to file under Chapter 13.

Lawmakers who favor the new law argue that it will prevent consumers from abusing the bankruptcy laws – using them to clear debts that they can afford to pay.

But consumer advocates argue that the new law is a gift to creditors – particularly the credit card industry, which may receive $1 billion or more from repayment plans due to the expected increase in Chapter 13 filings, according to Robert McKinley, CEO of CardWeb.com.

Credit counseling and money management: Under provisions of the new law you must meet with an approved credit counselor in your judicial district for a 90-minute session in the six months prior to applying for bankruptcy.

And before your debts are discharged, you must attend money management classes at your expense.