Last Minute Bankruptcies Skyrocket: Filers Hurry to Beat Oct. 17 Deadline

During the last week of September, bankruptcy filings were up 14%. The normal level of 30,000 filings for that period more than doubled as over 68,000 people filed for bankruptcy between September 26 and October 1.

The Bankruptcy Abuse Prevention Act, passed by Congress in April, takes effect October 17. Rules governing the enactment require filers who show they earn above the medium income level in their states to file under Chapter 13, which requires some repayment of debt. Prior to the new rule, these debtors could file under Chapter 7, which allows most debts to be written off. The new law is clear that it does not apply to people who are below the medium income.

The rule is intended to change people's attitudes towards only considering bankruptcy as a last resort. It is also hoped it will discourage people from filing as a way of managing personal finance. There is a new "means" test, which is a formula that replaces a judge's decision on whether a debtor can file for Chapter 7 to wipe out debts or Chapter 13 to create a repayment plan. Experts are divided on whether this will be of much benefit to the credit industry as far as repayments go, though they agree it may decrease the total number of bankruptcies filed each year.

Just before the effective date of the Act, another bill was introduced into Congress to help victims of natural disasters who choose to file for bankruptcy protection by excluding certain payments and allowing additional expenses. "Special circumstances" rules would make it easier for filers to qualify for Chapter 7 protection, or lower payments under Chapter 13.

Copyright © 2005 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 15, No. 10, 10/05