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PERSONAL FINANCE / KATHY M. KRISTOF

How New Bankruptcy Laws Affect Individuals

November 13, 1994|KATHY M. KRISTOF

In an effort to stem the rising tide of bankruptcy filings nationwide, Congress has overhauled the laws governing them for the first time in 16 years. The new law, dubbed the Bankruptcy Reform Act of 1994, was signed by President Clinton in late October and went into effect immediately.

While the bulk of the 50-page reform concerns corporate bankruptcy filings, a handful of important provisions affect individuals.

Here's a look at how the act altered previous law and what it means to you:

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Q: How does the new law change personal bankruptcy rules?

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A: It creates a new category of debts that can't be erased, or "discharged," through bankruptcy. It boosts federal exemptions, allowing some debtors to keep more of their assets. It protects prospective students from post-bankruptcy discrimination. It clarifies when you can use a bankruptcy filing to forestall a foreclosure. And it elevates the status of former spouses and children, giving them greater ability to collect back debts and allowing them greater latitude when taking a debtor to court.

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Q: What debts can't be discharged in bankruptcy?

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A: Most debts owed to the federal government--be it to tax authorities or student aid agencies--are not dischargeable. The new law adds that if you borrowed on a credit card to pay income taxes, which are otherwise not dischargeable debts, you can't erase that credit card debt either.

Also added to the list: marital debts you agree to pay as part of a divorce and money owed your ex-spouse in property divisions, dues and assessments owed to a condominium or cooperative association and criminal fines owed by a Chapter 13 debtor. In addition, if you buy luxury items or take cash advances against a credit card within three months of a bankruptcy, these debts generally cannot be discharged, says Robin Leonard, author of "How to File for Bankruptcy."

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Q: How does the law protect students?

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A: It prohibits lenders from denying a federally guaranteed student loan to a person who has filed for bankruptcy protection in the past.

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Q: How much of my assets can I keep when I file bankruptcy?

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A: That depends on the type of bankruptcy you file and where you live.

The new law doubles so-called federal exemptions for Chapter 7--personal liquidation--filings. These exemptions say debtors can keep up to $15,000 in home equity; up to $8,000 in accrued loan value in a life insurance policy; up to $8,000 in personal items, but none worth more than $400; jewelry worth as much as $1,000; a car worth as much as $2,400, and tools used in your trade worth as much as $1,500.

However, some state laws preempt federal bankruptcy exemptions.

California, for example, has separate bankruptcy exemptions that break into two tiers. One tier allows debtors to keep few personal assets but a substantial chunk of home equity. The other, which is more favorable to renters, allows you to use a home equity "credit" to shelter assets that would otherwise have to be sold to pay creditors.

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Q: How does the law protect former spouses and children of bankruptcy petitioners?

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A: First, it says that pending court actions aimed at determining paternity, child support or alimony will continue even after one of the parties to the suit files bankruptcy. In the past, these legal actions would be indefinitely stalled until the bankruptcy was settled.

Second, it adds debts owed to former spouses to a list of debts that can't be erased in bankruptcy. And it gives payment of child support and alimony greater priority, allowing these debts to be paid even before Internal Revenue Service can collect past-due taxes. (In effect, creditors affected by a bankruptcy line up to get paid. Where you stand in line often determines whether your debt is satisfied. Children and ex-spouses are now standing near the front of the line.)

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Q: How does the law affect foreclosure proceedings?

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A: A Chapter 13 bankruptcy filing can now stop a foreclosure process until the date of sale. However, once the home is sold in foreclosure, it can't be regained by a debtor who files for bankruptcy protection.

In the past, courts had great discretion over when and whether a Chapter 13 filing could stop a foreclosure. Some judges would actually reverse completed foreclosure sales, while others would rule that if a foreclosure sale had been scheduled, it was too late to stop it with a bankruptcy filing.

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Q: How does this law discourage personal bankruptcy filings?

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A: It doesn't, Leonard says.

Despite the original intent, the final law actually makes it easier for some people to file. It does, however, encourage Chapter 13--"work-out"--filings as opposed to the more serious liquidation filings under Chapter 7. And it provides some modest education provisions that aim to ensure that bankruptcy petitioners fully understand what they're doing and how it will affect them and their credit rating in the future, she notes.

In addition, the law recognizes bankruptcy petition preparers--non-attorneys who often file thousands of bankruptcy petitions for financially troubled, low-income individuals--and creates a new set of rules and penalties for preparers who abuse the process.

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