In 2005, bankruptcy laws changed as result of an overwhelming increase in filings of Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, the borrower's assets are liquidated to repay creditors as much of the debt as possible. Remaining debts are completely discharged and the debt is cleared, which means the creditors can no longer collect on the borrowers unpaid credit card debt. With a Chapter 13 bankruptcy, debt is not cleared, but the debtor is put on a debt repayment plan lasting up to five years. Some debts may be exempt from this plan and do not have to be paid back, and any debt left after five years is then discharged.
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With a mounting number borrowers defaulting on loans and payments, credit card companies and banks were losing out on a great deal of money from debtors discharging debt through Chapter 7 bankruptcy. The solution? Put more limitations and restrictions on the bankruptcy process, weeding out the consumers who abuse the system. The new 2005 legislation on bankruptcy included several major changes, particularly amending restrictions on Chapter 7 bankruptcy.
New Requirements and Restrictions
Now borrowers face a much more serious and complex process before they are even allowed to file for bankruptcy. For one, the debtor must complete a preliminary credit or debt counseling program before qualifying for a bankruptcy discharge. Debtors must also provide information about their last six months of employment, living expenses and income, as well as tax returns going back two years. If they do not qualify under the government issued "means test", which assesses this information, they may not be eligible for Chapter 7.
An even bigger concern for debtors is the fact that filing bankruptcy has gotten a lot more expensive. New restrictions require a candidate to complete a debt management class at his or her own expense before any debts are erased. Bankruptcy costs, including attorney and legal fees, have gotten higher as well. As a direct result of these changes, fewer debtors now qualify for Chapter 7 protection. For those that do qualify, facing the loss of their homes and possessions is already daunting, so jumping through even more hoops can make the process seem downright, not worth it.
Debt Settlement - A Better Option?
For consumers considering bankruptcy, less expensive and less severe alternatives such as debt settlement may be worth investigating. Typically, debt settlement helps borrowers settle debt for 50% less than what they owe. By negotiating with creditors, debtors are more likely to keep their homes and to not be left completely destitute, as with bankruptcy. Also, many debt settlement companies provide credit counseling as part of their programs, helping clients restructure finances and improve credit in the short term. While filing bankruptcy invariably is devastating to one's long-term credit history, debt settlement is much less damaging. Finally, with Chapter 13 bankruptcy, it can take people years to eliminate debt. Debt settlement companies can reduce that same debt to one lump sump for immediate repayment to creditors.
Many financial experts are concerned that Americans who need bankruptcy protection can no longer afford to file or do not qualify for Chapter 7. Since more debtors won't qualify for Chapter 7 under new laws and will now be forced to file Chapter 13 anyway, those who want to clear credit card debt quickly would be better served by using debt settlement.
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