Q: How does the new bankruptcy law affect me?

A: The answer to this question largely depends on the following one: Has your monthly income for the past six months exceeded the median (average) for your state? If so, then read on. If not, skip ahead by clicking here.

People with above-average incomes are most significantly affected by the new bankruptcy law. Essentially, these individuals are now forbidden from filing Chapter-7 bankruptcy, leaving them only with the option of Chapter 13. Under Chapter 13, you cannot automatically discharge all of your debts, as you can under Chapter 7. Instead, you enter into a partial payment agreement with your creditors, under which you will pay 100% of your disposable income, pro-rated to your creditors, for a period of three or five years, as determined by the judge. What is meant by "disposable income"? All earnings above your "basic living expenses." Who determines your basic living expenses? The IRS, not you.

Under Chapter 13, your (qualifying) debts are fully discharged at the end of your three- or five-year payback plan. Some debts -- such as child-support obligations, IRS taxes, and student loans -- are not dischargeable under Chapter 13 (or Chapter 7), but your monthly payment obligations may be lowered for the duration of your Chapter-13 plan.

Finally, there are two advantages that Chapter 13 enjoys over Chapter 7: For one, a Chapter-13 bankruptcy is removed from your credit report after seven years, whereas Chapter 7 stays on file for an entire decade. Secondly, under Chapter 13, all of your assets are out of your creditors' reach, whereas with Chapter 7, you may be forced to sell some of your belongings to pay back your creditors.

Regardless of whether your income is above or below the state median, or whether you file Chapter 13 or Chapter 7, you will have to enroll in mandatory credit counseling before declaring bankruptcy. For people declaring Chapter 7, this is essentially the main difference, post-new bankruptcy law.

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