Types - There are basically two ways for individuals to file: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy or "straight bankruptcy" is the most popular form of bankruptcy because it allows the debtor to "wipe the slate clean" and begin again fresh - well almost. There is still that business about restoring your credit to deal with, but for all intents and purposes, the weight of the debt you were not able to pay has been removed.

This code is available to individuals, couples, corporations and partnerships. The debts are usually discharged within 4-6 months of filing.

Non-exempt assets will go under the care of a trustee who liquidates them to satisfy creditors in order of their secured interests. Any wages a debtor earns is off limits to creditors who had a vested interest on the date of filing.

Those who lack sufficient income to cover outstanding debts after taking care of basic necessities, and who have no hope of ever repaying their creditors generally use this code. There are certain obligations that are not dischargeable, for example:

• Alimony and child support
• Back taxes less than 3 years old and student loans
• Recently made purchases for substantial amounts
• Property executed contracts involving titles or liens

Before considering chapter 7 you should take an inventory of the types of debt owed. This will give you a better idea if filing using this code whether it will give you the relief you seek.

Who should consider Chapter 7?

• If there is no hope of repaying any of your debts.
• If there are no cosigners involved,
• If court action by creditors is imminent, filing stays all collection proceeding while in court.

The Downside
Ruins your credit. But then, your credit is already in a shambles. But credit, believe it or not, can be repaired.

If you have a cosigner, they will still be responsible for the debt you discharge. Pay attorneys, court and filing fees upfront.

The Alternative
If you can't discharge enough of your debts or have to sacrifice too much property you may want to consider chapter 13 or a credit counseling / debt consolidation repayment plan.

Chapter 13 bankruptcy is the reorganization of an individual consumer's debt with a new payment schedule. If you have too much disposable income to qualify for chapter 7 or have assets you want to protect, you may want to consider this code. Your secured debts cannot exceed $750,000. Your unsecured debt cannot exceed $250,000.You must also have a steady income.

The debtor basically agrees to try to pay it back. The court decides the award, from 10% to 100% based on income and the kind of debt.

Non-priority creditors may be partially paid- credit cards and some taxes etc. (This is why financial companies have been lobbying so hard for so many years. By getting this portion of the code changed, they will have a better opportunity at recovering debts largely because they will be able to get inline with other major creditors istead of simply being dismissed.)

This was the best code to use if the petitioner has property they want to keep such as a mortgage that is about to be foreclosed on. It also calls off the collection hounds including the IRS and forces them to access you through a trustee.

Who should consider this chapter?

• If you are behind on your mortgage and need to catch up or if you owe the IRS.
• If the assets you want to protect would be liquidated under a chapter 7 and your disposable income is too high to qualify for a chapter 7.
• If you need relief from collection proceedings or if you wish keep your obligation to pay your creditors and need some breathing room.
• If you wish to leave the option of filing a chapter 7 at some time in the future. If you are a farmer who does not qualify for chapter 12 and have debt unrelated to farming.
• You filed chapter 7 sometime in the past 6 years. You have a co-signer. If you could pay your debts within 3-5 years.

Downside of Chapter 13
Chapter 13 ruins your credit. It will remain on your credit report for up to 10 years.

The key here is the much higher cost of credit during this period. Filing for bankruptcy doesn't keep the offers for credit from arriving on your doorstep.

The Alternatives
You can deal with credit cards, some medical bills, and other unsecured loans with a good plan, some perseverance, and some time. If you don't think you can do it on your own, get debt counseling

The New Law
The Changes

On March 11th, the Senate passed the bill, Congress approved it on April 14th and the President signed it into law four days later. It will be enforced on October 17th of this year (2005). Even if you think it doesn't affect you, you need to think again.

Here's how it works the new law will work:

The new law would force many debtors into Chapter 13, a code that requires repayment over a period of time. The means test would apply to those earning less than the median income of the state where they live. The current national average, according to Census Bureau data of 2003, the latest data available, show an average income of $43,318.
If you would like a state by state breakdown based on family size, visit the Census Bureau

Opponents of the bill cite the large number of working poor who seek protection from job loss or medical bills as the new victims. A study conducted by Harvard recently revealed a disproportionate number of bankruptcy filings was the result of medical bills. With 39.5 million residents of this country currently living in poverty, a full 12.5% of the population, this bill will eventually open the door for tighter legislation, lowering of the means test standards to include more income levels, and create a nation of impoverished debtors.

Previously, you could file Chapter 7 immediately, now you must pass a test to determine which chapter is best according to the new law.

The Means Test:
This will identify debtors who have the financial capacity to pay some money to their creditors. The test will work as follows:

TEST # 1: Is the family earning above the average income for their state?

1997 US average for a family of one = $18,762;
1997 US average for a family of two = $39,343;
1997 US average for a family of three = $47,115;
1997 US average for a family of four = $53,165.

TEST # 2:
If the answer is "Yes" to TEST # 1 ,

do you have excess monthly income of more than $166.66/month to pay $10,000 of debt over 5 years?

If the answer is "No" you must answer another question, if "Yes" Chapter 7 cannot be filed but Chapter 13 may be filed!

TEST # 3:
If the answer is "No" to TEST # 2

do you have excess income of greater than $100/month to pay over the next 60 months at least 25% of your unsecured debt?

If the answer is "No" you can file Chapter 7, if "Yes" chapter 7 cannot be filed but Chapter 13 may be filed!

You will need proof of income; you will get a $125,000 homestead exemption; you will need to have completed six months of counseling.

What you should do:

1. File now. Come October, filing for bankruptcy will get more expensive and more burdensome. Consumers will have to file complicated forms and take credit education courses before even getting to file.

2. Don't add debt to your home. It will work against you ­ you still have to pay your mortgage - and make it harder to keep during bankruptcy. I'd also like to add that you should not become emotionally attached the house. Keep the house it if you can but sell it if you cannot afford it. Two other important things to note: Any loan against your home is likely to come at a higher rate because your credit scores have dropped and secondly, you are vulnerable to predatory lending which is not only expensive but basically assures that you will need to sell eventually.

3. Beware your counselor. Scam artist come out of the woodwork during times like these. The Federal Trade Commission has a list of reputable credit counselors, find one there. These folks are counselors and not attorneys. If bankruptcy is the only option, get an attorney. The National Association of Consumer Bankruptcy Attorneys is a great place to start.

4. Know the warning signs. Credit card debt should be focused on first and if you have in excess of $12,000 on those cards - the national average by the way ­ you need to pull out the stops and get yourself some help. Many people who carry these kinds of balances cannot meet their obligations as well. Don't put it off.

Should you have to file for bankruptcy after the new law takes effect in October, your first obligation will be to your creditors. Your children will need to get in line behind them.

Previous articles on the new law