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What the new bankruptcy laws mean to you

A major new law will make it more difficult to declare bankruptcy. Jean Chatzky explains some of the new measures.

A couple of weekends ago in Chicago, 1,600 bankruptcy attorneys from around the country gathered to learn the ins and outs of the new bankruptcy reform law that goes into effect on October 17.

Attorney Max Gardner from Shelby, N.C., was in the crowd. "I've done consumer bankruptcy work since 1974. I went through the last round of changes in 1979. This was the most complex seminar I've ever been through," he said. "My head still hurts."

And that's what the changes are doing to attorneys — for whom there's a big silver lining in terms of fees that will escalate, in some cases even double. Where consumers are concerned, the changes in George Bush's Bankruptcy Abuse Prevention and Consumer Protection Act are even more daunting. They make it harder (particularly for middle-class folks) to qualify for Chapter 7 bankruptcy protection, which allows you to cancel your debts, give back the underlying assets like houses and cars, and make a fresh start. Instead, most of those people will have the option of filing Chapter 13 and paying back their creditors — not for three years as the old law specified, but for five.

The good news in all of this is that it's still August. Now is the time to figure out if you really need to file bankruptcy. And if you do, to hustle to an attorney's office well before the October deadline rolls around. Here — in a nutshell (though this somewhat vague piece of legislation is very difficult to actually fit into one) — is a look at some of the questions people who are considering bankruptcy should be asking:

Will I qualify for Chapter 7? You have to pass a means test that says that individuals who reside in households where the total income is greater than the median income in the state in which they live (in New York for a family of four it's $66, 206) are ineligible.

How much do I have to pay back under Chapter 13? That's determined, again, by formula. Essentially, the government wants to make sure that you pay your creditors at least as much as they'd have received if you filed Chapter 7 and gave back the underlying assets. Stretching the time horizon from three years to five is a way to ensure your creditors — particularly your credit card companies and auto lenders, who lobbied hard for this legislation — get paid.

What about retirement assets? There's a bit of good news here. Under the old law, 401(k) assets were exempt from bankruptcy proceedings. Under the new ones, individual retirement plans — like IRAs — are safe up to $1 million. Rollover IRAs have no limit. And under the old law you're not allowed to continue to repay pension loans; under the new law you can. "That's very positive," says Jay Fleishman, a New York bankruptcy attorney.

"I hear you can shelter some money by buying a big house in Florida ... will that work?" Yes, but it's not as easy as it used to be. In order to claim the homestead exemption in Florida and several other states, you have to have lived there for 40 months. Otherwise, the exemption is capped at $125,000.

How much will all of this cost me? More than it used to, that's for sure. The cost of filing a simple Chapter 7 used to be well under $1,000. The new law bumps the filing fees by about $60. But more than that, it requires lawyers to jump through hoops including double-checking all of a client's personal information. That'll boost the overall cost of legal fees by 25 to 50 percent, depending on your attorney.

And here's the other hitch: Before you can file, the new law requires mandatory credit counseling. That throws you into a hornet's nest. There are many good credit-counseling agencies out there, but there are also a lot of scamsters out to grab outlandish fees from money you don't have. In this space next week, I'll tell you how to tell the difference.

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, .