WHEN THE proposed new bankruptcy law is finally signed, you'll be surprised at how complex the process is going to be.
Not only will it be harder to wipe out bills and start fresh. Bankrupts will also face extra costs and a mandatory counseling system that hasn't been entirely set up. You may have to wait for counseling while the interest charges mount on your unpaid debts. Creditors will have a stronger hand.
At the moment the bankruptcy bill is stalled, awaiting a conference between the House and Senate. The Senate majority leader, Trent Lott, and the minority leader, Tom Daschle, are feuding over whether the Senate portion of a conference committee should be half Democrat or majority Republican.
Once that's resolved, the bill will almost certainly pass. It takes effect 180 days after the president signs it into law.
Generally speaking, here's how bankruptcy will proceed, says bankruptcy specialist Todd Zywicki, a law professor at George Mason University in Arlington, Va.: Before going bankrupt, you'll have to go through consumer credit counseling, at your expense. The counseling service will try to work out a repayment plan that satisfies your creditors.
This typically takes up to two months and sometimes as much as three months, says John Berglund, president of the Greater Denver chapter of the National Foundation for Credit Counseling. During this time, the late charges on your bills keep accumulating.
If you can't repay, you'll file for bankruptcy. This finally stops the clock on the late charges on your outstanding bills.
You'll disclose your income and assets to the court, with one new requirement: Your disclosure has to include your most recent tax return. That's to stop bankrupts from misstating what they earn.
There's a new income test for people who want a Chapter 7 bankruptcy. This chapter lets you wipe out your unsecured debts, mainly credit-card debt (for the wealthy, personal loans).
You can file automatically for Chapter 7 if you earn less than the median income in your state. Nationally, that would be $36,200 for a single man age 35-44, $20,683 for a woman in the same group and $59,981 for any family of four.
You'll still owe all your secured debt, such as your mortgage. The new law puts more of your debt into the secured category.
Today, for example, a bankrupt's auto loan is reduced to the market value of the car. Under the new law, however, you'll have to repay the loan in full if you want to keep the car. Part of your normal credit-card debt will also become secured, says professor Elizabeth Warren of Harvard Law School.
If you earn the median income or more, the bankruptcy test has a second part. Can you afford to make monthly payments, over the next five years, adding up to $10,000 or more (or at least 25 percent of your debt, with a $6,000 minimum)?
If so, you cannot get Chapter 7. You have to apply for Chapter 13, which is a court-supervised repayment plan. Bankruptcy attorney Eric Frank of Miller, Frank and Miller in Philadelphia says that, in his area, lawyers currently charge $600 to $800 more for a Chapter 13 than a Chapter 7.
Home equity remains a fighting issue. In five states (Texas, Florida, Iowa, Kansas and South Dakota), bankrupts can keep their entire home equity - even if it's in the millions.
The Senate thinks that's fine, and President Bush agrees. The House would let creditors tap home equity worth more than $125,000 if you've lived there for fewer than two years.
Wealthy bankrupts might have to cover some of their debts under the new bankruptcy-income test. But they'd still have their big home equity left.
Renters get harsher treatment. Their budget for living expenses will limit what they can spend. They might have to give up their apartments and move to something smaller. It never pays to be poor.