For Americans drowning in debt, the end is nigh. Well, it may not be the end, but time is undoubtedly running out for Americans seeking bankruptcy protection before a tough new bankruptcy code kicks in Monday. The new legislation aims to "strengthen the integrity of the bankruptcy system" by stiffening standards, especially for high-income filers. In advance of the new rules, a record number of people -- more than 10,000 a day in recent weeks -- have been filing for bankruptcy since the law was passed in April. There were 1.6 million personal bankruptcies filed in 2004, according to the Administrative Office of the U.S. Courts, a number guaranteed to be eclipsed this year. Among the more stringent rules is a tightening of limits for people whose income exceeds their state's median income in the six months before filing. Those folks may not be able to file for Chapter 7 bankruptcy, which lets consumers dump their debts and start afresh altogether, but instead be forced into a Chapter 13 filing, which entails repaying creditors under a court-approved plan. Wealthy bankruptcy filers -- an all-American paradox if there ever was one -- also will be restricted if they were planning to hang on to their palaces under "homestead exemptions." The new law limits the home exemption to $125,000 if the filer bought his residence less than three years and four months before filing. This feature was specifically designed to stop the super-rich from erecting expensive mansions in sunny states such as Florida just prior to declaring bankruptcy. The newly bankrupt also will be on the hook for luxury-item purchases and cash advances made immediately before filing. And instead of repaying the current value of a car, as the present law allows, the new law requires the full amount of the outstanding loan to be repaid.
Aside from making it tougher for wealthier Americans to shuck their debt obligations, the new law also calls for counseling requirements. Bankruptcy filers will have to sit through credit classes within six months of filing and take a debtor education course before exiting bankruptcy protection. And these sessions can't be avoided if filers can't afford the tuition, which, by the way, hasn't been set yet. Local trustees and bankruptcy judges can waive the fees for those who can verify they are unable to pay. One notable exception is that Hurricane Katrina victims will be excused from the fees and will be given leeway from the income requirements. Active-duty members of the military, low-income veterans and people with severe medical disabilities also will receive special treatment. The cost of filing will rise as well. Those suffering from the injury of declaring Chapter 7 bankruptcy now will have the added insult of paying $274 to file, up from $209, as of Monday. The cost of Chapter 13 will drop slightly to $189 from $194, in addition to whatever credit counseling or administrative fees that some bankruptcy courts charge. One beneficiary of the tough new law will be the legal community. A bankruptcy lawyer typically charges between $800 and $1,200, with many offering a free initial consultation. Due to the crush of new cases and tougher requirements for lawyers themselves, however, those fees are expected to rise substantially, perhaps even double, according to a recent poll from the American Bankruptcy Institute.