Oct 16, 2008

Myth Persists that Chapter 7 Bankruptcy Is Harder to File

A reviewer of my new foreclosure book took me to task for underestimating how difficult it had become to file a Chapter 7 bankruptcy under the 2005 bankruptcy legislation. Many people have this misconception. It's true that bankruptcy became more expensive, if you use an attorney -- attorney fees doubled under the new law in many parts of the country. And it's also true that there are a few additional hoops to jump through. However, self-help is a reasonable option for most bankruptcy filers and the new hoops are easily navigated.

Probably the biggest misconception is that many people are barred from Chapter 7 because their income is too high. The new bankruptcy law did make filing more difficult for people whose incomes exceeded the median income for their state, but only between 5% and 10% of would-be filers face this problem. All the others slide easily under the median income bar.

The new bankruptcy law did make it more difficult to get rid of some types of debts -- private commercial loans, recent credit card charges, and debts incurred in a divorce or separation decree -- but the vast majority of debts that could be discharged under the old law can continue to be discharged under the new law, including credit card and medical debt, deficiencies from foreclosures and repossessions, and bank loans.

Under the new law, filers have to undergo two mandatory counseling sessions -- one before and one after filing -- but these have not proven to be a barrier to filing, at least after an initial confusion due to ignorance of the new law. Also, the new law requires some additional documentation, such as tax returns, wage stubs, or bank records, but once again, virtually all filers can handle these items.

There are many things to consider when deciding whether to file bankruptcy, but you should not be misled into believing that it is no longer feasible. For almost all filers, the new bankruptcy is very much like the old bankruptcy -- an essentially administrative process in which you disclose information, appear for one brief meeting with the trustee, and wait for your discharge papers to arrive in the mail 60 days later.