A:

Credit card companies and banks hate deadbeats who take from their bottom lines. They especially dislike the Chapter 7 bankruptcy that discharges a debtor and, if he or she has no saleable assets, eliminates their chances of reclaiming even a portion of the debt. Consequently, heavy lobbying by lenders resulted in the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This law is less a "Consumer Protection Act" and much more of an insurance policy for lenders.

Two-thirds or more of all personal bankruptcies leading up to 2005 were filed as Chapter 7, but under the act, qualifying for a "fresh start" via Chapter 7 bankruptcy has been made much more difficult. Now, debtors are required to file under the less attractive Chapter 13, which amounts to a court-ordered repayment plan. The scales used to separate debtors into Chapter 7 or Chapter 13 bankruptcies have been tipped by the introduction of means tests.

In the first means test, a debtor's finances are measured to determine whether or not he or she can repay 25% of outstanding unsecured debt. The formula exempts set amounts of basic expenses and considers the remainder in its entirety. Standard of living expenses are determined by an IRS evaluation and not by the debtor's standards. A debtor who passes the first means test without being led to Chapter 13 will be subjected to a second metric of median income. If the debtor's income exceeds the state median, he or she will have to file Chapter 13, which means lenders can recuperate at least some of the debt.

Exemptions also have been tightened to the point where a debtor could reasonably file for bankruptcy and still lose his or her house in the ensuing case. In addition, filing for bankruptcy has incurred another downside in the form of higher lawyer fees resulting from the increased paperwork involved in processing bankruptcy filings. In fact, bankruptcy law is on the verge of becoming a specialized field and the skyrocketing fees reflect that.

At best, a debtor loses in a bankruptcy filing because his or her credit rating is crushed. Now that new bankruptcy laws have tilted the scales in favor of lenders, it is more important than ever for individuals to monitor personal finances carefully and to control debt.

(For more on bankruptcy, read Changing the Face of Bankruptcy and What You Need to Know About Bankruptcy.)

This question was answered by Andrew Beattie.

RELATED FAQS
  1. Can personal loans be included in bankruptcy?

    Read about debts that are dischargeable when filing for bankruptcy. Learn about how personal loans are treated when filing ... Read Answer >>
  2. When will bankruptcy be removed from my credit history?

    I filed for bankruptcy 10 years ago in November. Firstly, I do not know which category I applied for. ... Read Answer >>
  3. What are the differences between Chapter 11 and Chapter 13 bankruptcy?

    Discover the differences, including respective advantages and disadvantages, between Chapter 11 bankruptcy and Chapter 13 ... Read Answer >>
  4. What are the differences between Chapter 7 and Chapter 13 bankruptcy?

    Read about some of the primary differences between a Chapter 7 and Chapter 13 bankruptcy, including who may be ineligible ... Read Answer >>
  5. Can I file for bankruptcy more than once?

    Learn about some of the limitations placed on debtors who are considering filing multiple bankruptcies, particularly if the ... Read Answer >>
  6. What are the financial consequences of filing for bankruptcy?

    Learn about the various consequences, both positive and negative, that you can expect to result from your filing for bankruptcy. Read Answer >>
Related Articles
  1. Markets

    Credit And Debt Management: Debt Collection And Bankruptcy

    by Cathy ParetoIt's never a good day when a debt collector is knocking on your door. Not only is being on the receiving end of debt collection costly, it can be downright stressful and humiliating. ...
  2. Investing

    File Chapter 7 Bankruptcy

    Chapter 7 is the "liquidation" form of bankruptcy. When people file for Chapter 7, the trustee may sell some of the filer's assets to pay creditors.
  3. Retirement

    Should You File For Bankruptcy?

    Find out how to determine whether this option will help or hurt your financial situation.
  4. Retirement

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  5. Markets

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  6. Personal Finance

    Your Guide To Chapter 7 Bankruptcy

    Filing for Chapter 7 bankruptcy triggers an automatic stay that forbids businesses from collecting on your debt, or suing you.
  7. Investing

    Taking Advantage Of Corporate Decline

    A bankrupt company can provide great opportunities for savvy investors.
  8. Personal Finance

    Bankruptcy

    Learn what happens when an individual or an organization files for bankruptcy.
  9. Investing

    Alternatives To Business Bankruptcy

    Bankruptcy isn't the only alternative for a struggling business. It can try negotiating with creditors or liquidating assets outside the U.S courts.
  10. Personal Finance

    Life After Bankruptcy

    Find out what you have to look forward to after filing for Chapter 7 or 13.
RELATED TERMS
  1. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  2. Bankruptcy Abuse Prevention And Consumer Protection Act - BAPCPA

    Legislation enacted by President George W. Bush in 2005 that ...
  3. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  4. Chapter 10

    A type of corporate bankruptcy filing in the U.S. Chapter 10 ...
  5. Chapter 7

    A bankruptcy proceeding in which a company stops all operations ...
  6. Chapter 13

    A U.S. bankruptcy proceeding in which the debtor undertakes a ...
Trading Center