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.

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