It'll soon be harder to erase your debt

WASHINGTON — The most sweeping rewrite of the U.S. Bankruptcy Code in a quarter century, making it harder for debtors to erase credit-card and other obligations in court proceedings, goes into effect Oct. 17.

The legislation was passed by Congress and signed into law by President Bush in April after an eight-year campaign by banks, retailers and credit-card companies.

A major provision of the law sets up an income test for determining whether people can have their debts canceled in exchange for forfeiting certain assets or if they must repay them under a court-ordered plan.

The change will affect an estimated 30,000 to 210,000 people a year, and there already has been a rush to the courthouse by those wishing to file for bankruptcy under the current law, which generally allows federal bankruptcy judges leeway to determine the fate of debtors' assets and how much they must repay.

Among the changes made by the new law:

• It sets up a new test for measuring a debtor's ability to repay. People with insufficient assets or income still can file a Chapter 7 bankruptcy, which if approved by a judge erases debts entirely after certain assets are forfeited.

But those with income above their state's median income who can pay at least $6,000 over five years — $100 a month — will be forced into Chapter 13, under which a judge orders a repayment plan.

In calculating income, people filing for bankruptcy may deduct various expenses as defined by the Internal Revenue Service, including food and clothing, and some health- and disability-insurance expenses.

• People seeking bankruptcy protection are required to take credit-counseling courses within 180 days, or about six months, of filing.

• It gives priority to a spouse's claims for child support among creditors' claims on a debtor in bankruptcy.

• The law allows for special accommodations for active-duty service members, low-income veterans and those with serious medical conditions in the new income test for bankruptcy applicants.

• The law supersedes the unlimited homestead exemptions in states including Florida, Iowa, Kansas, South Dakota and Texas that allow wealthy people to file for bankruptcy and keep their mansions sheltered from creditors. The law limits the exemption to $125,000 if the person in bankruptcy bought his or her residence less than three years and four months before filing.

• It also requires billing statements for credit-card accounts to include an example of how long it would take to pay off a balance at a specific interest rate if only minimum payments are made.

The law also makes it tougher for businesses that file for bankruptcy protection:

• The law limits the exclusivity period, the 18-month span during which a company in Chapter 11 has the sole right to propose a reorganization plan. Debtor companies are no longer given unlimited extensions of the exclusivity period.

• It limits the ability of companies to give lucrative pay packages as a way of retaining top executives.

• Companies must decide within 210 days, or seven months, whether they will keep or relinquish leases on property.

• Creditors can seek to have a Chapter 7 liquidation filing dismissed or converted to a debt-reorganization plan under Chapter 11.