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Life Under The New Bankruptcy Law-Should You Try Debt Consolidation First?

There were made some significant changes in the bankruptcy law on October 17th, 2005. First, you have to go through a means test , which is best on your average income and last IRS tax filing, to find out if you can file Chapter 7. Note, you can only file Chapter 7 once every eight years, and it cost about $300 in fees directly to the government to file for Chapter 7 or 13.

Then you have to have gone to credit counseling over the last six months to file for bankruptcy, and have to continue going for some time before you get discharged. You should compare carefully where you will be if you go through this process. You may be better off getting a Debt Consolidation loan and renegotiating either on your own or with some help, at least your unsecured debts. Another thing to note about the new law (this is a 500-page document) is that there are restrictions on going out and buying things right before the bankruptcy filing and then claiming their value is only what their resale value, instead of their full price.

If you do file for Bankruptcy, what happens to your debts? They get divided into three categories. First you have priority debt, which includes back taxes owed to the IRS and alimony and child support. Then you have secured debt. This is debt on items such as a house and a car that you owe money on, and that have a lien against you. You have to pay the money in arrears, and make regular payments, if you want to keep your house, your car, and similar items. Everything else is unsecured debts, such as credit card debt, medical bills, some old taxes owed to the IRS and unsecured bank loans. These people if you file bankruptcy either get nothing, or only a portion of the money you owe them. Many times if you go for Credit Counseling and get a Debt Consolidation agreement, you can write down significant portions of the debt you owe unsecured creditors, because they know that if you are forced into Bankruptcy of either Chapter 7 or 13, they could wind up with absolutely no repayment. If you want to keep your car, truck, or house, you have to pay the back payments under your Chapter 13 plan, and there has to be no more equity, that is value that you dont still owe.