I heard there is a new bankruptcy law. What are the details?

A: Starting in October, it'll be harder for people to file for personal bankruptcy under Chapter 7, says Veterinary Economics Personal Finance Editor Fritz Wood, CPA, CFP. Under Chapter 7, debtors can wipe away unsecured debts such as credit card bills after certain assets are liquidated. "A new means test will determine an applicant's eligibility for Chapter 7 bankruptcy," Wood says. "Applicants with income above the median level for their state will be required to file under Chapter 13, a process that consolidates a person's debts and requires payments to creditors over a three- to five-year period. The means test will shift more Chapter 7 applicants into Chapter 13 and its stricter rules."

Also, people seeking bankruptcy protection must first undergo credit counseling, he says. "This process will encourage many to work out a repayment plan, rather than declaring bankruptcy," Wood says. "A credit counselor will examine the debtor's budget and debt-to-income ratio and will look for spending cuts and other savings that can help with monthly payments. Those of little means will still be encouraged to file for bankruptcy, while those with higher incomes will enter a debt-management plan (DMP)."

A DMP is a counselor-brokered repayment agreement in which the debtor agrees to stop using credit cards and make monthly payments in exchange for the creditor's willingness to reduce interest rates and other fees, though the total amount owed doesn't change, Wood says. Consumers make a single lump-sum payment to their credit counselor each month. The counselor then doles out payments, less a monthly administrative charge of $25 to $40, to the various creditors. Ideally, debt is retired in five years or less.

Fritz Wood, CPA, CFP

Editor's note: Send your legal questions to ve@advanstar.com