Deadline looms for reformed bankruptcy rules

What do you do when your home and your livelihood are wiped away in a single blow?  For victims of the recent hurricanes the obvious choice is to file bankruptcy.  But many are concerned that new bankruptcy laws in affect October 17th will make that process too difficult on anyone in financial difficulty. “Today” financial editor Jean Chatzky was invited on the show to explain the changes and offers advice on why you may want to file now. Here are some tips.

What happens when your home and your livelihood are wiped away in a single body blow?  Sometimes you have no choice but to raise the white flag and file bankruptcy. But the new, tougher bankruptcy laws that go into effect October 17 could put victims of Hurricane Katrina and Hurricane Rita in a particular bind. 

They may not know if bankruptcy is a necessary step for them.  They don't know when they'll find work -- which means they don't know how long their savings, if they have savings, will last.  They don't know how much they'll be able to recover for their lost homes and lost belongings.  According to The Insurance Information Institute, the problems that home owners are facing in terms of assessing damage and what they can claim is mirrored by the insurance providers.  Like home owners, insurance adjusters are having a difficult time reaching homes to assess damage.  In addition, the insurance industry is so overwhelmed that it will often take 1 to 2 months before an adjuster visits a home.  By the time they are able to make a decision about filing for bankruptcy the new law will have taken effect.  [As a side note, the Insurance Information Institute says that wind damage is covered by home owners insurance, flood damage is not.  Flood insurance is available through FEMA, but a lot of Katrina and Rita victims didn't buy it, either because they didn't think they needed it or couldn't afford it.  No matter what your situation, even if you have not seen your house yet, file a claim.  It could take a long time for the paper work to go through, but it’s better to begin the process sooner than later.]

A study by Robert Lawless, soon to be published in the Nevada Law Journal on hurricanes and bankruptcy says it's not typically until 3 years after a hurricane hits that resulting bankruptcies hit their high point. In the short term, state and federal aid and a boom in construction jobs put a band-aid on the problem. Three years later, the rebuilding is over, everything settles out and individuals realize how much additional debt they've taken on to get their lives back in order. That's when the other shoe drops.

Hurricane or not, anyone in financial difficulty will find it harder to file. Pro-consumer groups complain the news laws are too tough and seem to benefit credit groups NOT the consumer.

Grandfathering hurricane victims under the old law
There has been some talk of repealing some of the harsher provisions of the new law for Katrina victims. The White House has said that it may offer hurricane victims some relief, but that it's not going to delay the law in its entirety.

Can people in New Orleans hurry up and file?
They can try, but they're going to find it challenging. In general, individuals are required to file for bankruptcy in their home town which is defined as wherever they spent most of the last 180 days.  For many of these people, that's still New Orleans. The bankruptcy court has reopened — it's sharing space with the court in Baton Rouge. But filers still have to find a lawyer and they're going to have to piece together paperwork from records that in all likelihood have been destroyed.  

What does the new bankruptcy law means
The new law, officially called the Bankruptcy Abuse Prevention and Consumer Protection Act make it harder — particularly for middle class folks — to qualify for Chapter 7 bankruptcy which allows you to cancel your debts and get a fresh start. Instead, most of these people will have the option of filing Chapter 13 bankruptcy and paying back their creditors, not for three years as the old law specifies but for five. That's why consumer advocates read this law as pro-bank industry, pro-credit card industry and anti-consumer.

It protects $1 million in retirement funds, but only $5000 per child in education savings — and you can't exempt more than $125,000 in home equity unless you've resided in a state for three years and four months and it's a highly divisive issue. The American Bankers Association says the new law brings greater fairness. The Consumer Federation of America says it's harmful and mean-spirited.

Is this the kind of thing you can file on your own?
That's another part of the problem. One attorney who sat through a weekend seminar getting up to speed on the new law said his head still hurt for three days!  Now, as consumers, his headache isn't our problem. But the fact that the new law is so cumbersome attorneys fees for filing a bankruptcy are supposed to double absolutely is.

So what do you do?  For the general population, filing before the deadline is a good idea if you can swing it.  Here's why:

Means testYou will not, under the new law, qualify for Chapter 7 if you don't pass a means test. That shows your household income is lower than the median income in your state.

Under Chapter 13, you'll pay back moreChapter 13 is designed to pay your creditors back as much or more than they would have received under Chapter 7. Plus, under the new law you have to repay for 5 years.  Under the old law it's 3 years.

You can't necessarily save your home
Only $125,000 in home equity is yours to keep. That's the maximum number, it varies by state. Likewise, only $5,000 of college savings.  One good piece of news: Retirement plans are safe up to $1 million.

It will cost you moreThe cost of filing a simple Chapter 7 used to be under $1,000. The new legislation will likely double it.

What if you don't know if you should file?
See a not-for-profit credit counselor who has the Better Business Bureau's seal of approval.  About one-third of people who seek credit counseling need to file bankruptcy, the other two-thirds do not.  A reputable credit counselor will run the numbers and tell you the difference.

What about victims of the hurricanes?
The one bit of wiggle room is that the new law does give judges the ability to identify individual victims of special circumstances like hurricanes and let them file the more lenient Chapter 7 rather than the tougher Chapter 13. You may want to hook up with an attorney who feels he will be able to win that argument.

Quarterly filings from April to June were already up 11 percent to a record 467,333 according to the American Bankruptcy Institute.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright © 2005. For more information, go to her Web site, .