Updated July 9, 2001

Bankruptcy law, which traditionally has allowed those in financial trouble to get a fresh start, just got a major overhaul by the United States Congress. Both the House and Senate (at the behest of the credit card and banking industry) passed legislation that makes it difficult -- or impossible -- for some people to file for bankruptcy. If the House and Senate can work out a few differences between their respective versions of the bill, President Bush is likely to sign the legislation. The new rules would take effect 180 days after the bill is signed into law.

Given the big backers of the legislation, it's not surprising that the bill is unfriendly to debtors. The bill would prohibit some people from filing for bankruptcy, add to the list of debts that people cannot get rid of in bankruptcy, make it harder for people to come up with manageable repayment plans, and limit the protection from collection efforts for those who file for bankruptcy.

The credit industry says the changes are needed because the increasing number of personal bankruptcies -- almost 1.3 million in 2000, up from about 700,000 in 1990 -- is costing them too much money. Opponents say the credit card companies brought their problems on themselves, by sending out billions of solicitations each year for high-interest credit cards and encouraging consumers to run up high debts.

This article discusses changes that affect both Chapter 7 (which lets people erase many debts) and Chapter 13 (under which debtors pay back part of what they owe over several years) bankruptcy.

Fewer People Eligible for Chapter 7 Bankruptcy

Traditionally, bankruptcy's fresh start has been available to almost everybody. The new law, however, will prohibit some people from filing for Chapter 7 bankruptcy altogether -- those whose incomes are above the state median (quite low in some states) and who can pay as little as $100 per month to creditors. Whether or not a debtor can afford to pay $100 or more a month is determined not by the person's actual income and expenses, but by IRS rules that state what "reasonable" expenses are.

People denied a Chapter 7 bankruptcy would either have to file for Chapter 13 bankruptcy and come up with a three- to five-year repayment plan, or keep slipping further behind on their debts.

This restriction is one reason many women's groups opposed the bankruptcy legislation. People who can't file for Chapter 7 bankruptcy and wipe out their credit card balances, they fear, will have less money available to pay other debts -- child support, for example.

Fewer People Able to Stick to Chapter 13 Repayment Plans

Debtors pushed into Chapter 13 bankruptcy because Chapter 7 is no longer available to them will find that the new law has also made Chapter 13 bankruptcy more difficult. In Chapter 13 bankruptcy, debtors must put together a repayment plan, basing their payments on their income and expenses. Under the new law, actual expenses for many things won't matter -- debtors will be allowed to claim only certain amounts for certain expenses (housing, for example), even if the actual cost is much higher. Some people, especially those living in areas where the cost of living is high, will be unable to follow through with a repayment plan.

Delays in Filing

Another roadblock will delay people who have not yet filed a tax return for a recent year. Anyone filing for Chapter 7 bankruptcy must provide a tax return for the most recent taxable year; those filing for Chapter 13 must be current on tax returns for the previous four years.

Less Protection from Creditors' Collection Efforts

One of the most powerful aspects of current bankruptcy law is called the "automatic stay." This jargon refers to rules that immediately halt almost all collection actions and lawsuits against someone who files for bankruptcy.

The new law places new limits on the automatic stay. Among other things, the automatic stay would no longer postpone:

• Evictions. Filing for bankruptcy wouldn't stall or stop an eviction lawsuit.
• Actions to withhold, suspend or restrict a driver's license or professional or occupational license.
• Lawsuits to establish paternity, child custody or child support, to get a divorce or related to domestic violence.

Fewer Debts Wiped Out

Some types of debts can never be wiped out in bankruptcy, and the legislation will expand this list.

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