Bankruptcy: The word alone can conjure a range of emotions including shame, disapproval, and fear. If you`ve been through a bankruptcy, you may wish it never happened. If you haven`t ever had to file, you may judge those who have as simply irresponsible with their finances. The truth is, common life events such as divorce, a small business that goes under, a lawsuit, or an unexpected illness can throw anyone`s financial life into a tailspin and land them in bankruptcy court.

According to the latest research on families and bankruptcy by Harvard Law Professor Elizabeth Warren, nobody is immune from the possibility of bankruptcy. Bankruptcy occurs in all walks of life and income levels. "The data show that families filing for bankruptcy last year were a cross section of middle-class America," she says. Warren has reported last year`s bankrupt debtors to be:

• At an educational level slightly higher than average in the U.S.
• About a 50/50 mix of homeowners and renters.
• Employed in fields that mirror the range of occupations in the U.S. job market.

What happens in bankruptcy currently?

Currently, the large majority of debtors file under Chapter 7 of the bankruptcy code. This is often called "straight bankruptcy." In a Chapter 7 filing, some or all debts are discharged (or written off). In exchange, the debtor may lose property that was not "exempt" from bankruptcy. The process usually takes some 30 to 90 days, and after it`s completed, debtors can begin to rebuild their financial lives. While these consumers will pay much higher rates for credit, and find it more difficult to reestablish credit, they are able to start over again when their bankruptcies are completed.

A much smaller percentage of consumers file under Chapter 13 of the bankruptcy code. This is often called a "wage earner`s plan." In a Chapter 13 filing, the consumer agrees to pay back a portion of his or her debts under a court-ordered plan administered by a bankruptcy trustee. Chapter 13 is chosen when a consumer wants to make a good faith effort to pay back debts, when he or she doesn`t qualify for a Chapter 7, or because there are some assets the debtor wants to keep, but would lose under a Chapter 7 plan. Debtors typically are not able to begin rebuilding their credit until the bankruptcy plan is completed, but there is a bright side: Chapter 13 bankruptcies are removed from credit reports 7 years after filing, while Chapter 7 bankruptcies are reported for 10 years from filing.

How will the law change if the bill is passed?

The basic goal of the bill is to force more bankruptcy debtors to repay some of their debts over three to six years in a Chapter 13 bankruptcy rather than using the "straight" Chapter 7 bankruptcy that most people now use to eliminate most or all of their debts. Under the proposed legislation, if a family earns more than the median income for their state (in Texas, for example, that means more than $53,513; Oklahoma, $48,459; California, $63,206) they may be ineligible to file for Chapter 7, and may be forced to pay back some of their debts over a five-year period. Here`s the concern with this approach: to determine how much they must spend on their debt repayment plan, the bankruptcy trustee will rely on IRS figures as to what is "reasonable" for the family to spend on living expenses. Whatever is left over after reasonable expenses (even if their actual expenses are higher), will have to go toward paying back their debts.

For example, a family of four earning $3500 a month may be allowed to spend up to $574 a month for food, and just $51 for personal care and products under IRS nationwide guidelines. If you live in Houston, you may only be allowed to spend $307 a month for car payments, gas, and repairs. In Tampa, the limit could be $283 a month. Those figures may seem awfully low, but if you can`t live within the "reasonable spending" guidelines you may be out of luck; forced to drop your bankruptcy case and face aggressive collection efforts instead. Some of the potential repercussions if this bankruptcy bill becomes law include:

• More aggressive debt collection. The Federal Trade Commission reports that it receives more complaints about debt collectors than any other industry. This legislation is likely to increase collection efforts because some consumers will not be able to stick with a Chapter 13 plan or find protection in bankruptcy.
• Slower recovery for those who file. Currently, most people who file for Chapter 7 bankruptcy and are proactive in rebuilding their credit can qualify for mortgages, car loans and other credit in as little as two years after they file. If a consumer files a Chapter 13, however, they will not be able to even start rebuilding credit until their bankruptcy is completed, which may be as long as five years after they filed.
• Small business failures. According to Warren, the proposed legislation would also "�make it more difficult and more expensive for any business with less then $3 million in debt to reorganize, but for any business with more than $3 million in debt, it`s business as usual." If a small business must file and can`t reorganize, the suppliers to whom it owes money may be out of luck as well.

There is a better way. Regardless of your financial situation, and no matter what happens with this legislation, it`s important to start making yourself "bankruptcy proof." That means paying down debt, making sure you have adequate insurance, and building a solid source of income not dependent on the whims of your employer. (Some 70% of bankrupt consumers end up filing after losing a job.) The EverydayWealth system is ideal for helping you achieve this.

What you can do

You can let your legislators know how you feel about bankruptcy reform by contacting them at www.congress.gov. But if the legislation does pass and becomes law, there are some additional steps you should take immediately:

1. If you have large amounts of debt it`s critical that you create your EverydayWealth Savings Guide and figure out whether you can realistically pay back your debts yourself within three to six years. Look at the payments required to pay back your debts and ask yourself whether you could stick to that payment schedule. If you have any doubts - or expect any large expenses that may make it difficult to follow that plan - consider consulting a credit counseling service and/or a bankruptcy attorney for one-on-one help.
2. If you are paying your debts back through a credit counseling program, take a hard look at whether you can realistically follow through with the program or if filing bankruptcy would be a better choice.
3. If you have high debts and are concerned about your ability to pay them, meet with a bankruptcy attorney now. If the bill is passed, bankruptcy attorneys will get very busy, very quickly - and their fees are expected to double. Make an appointment now to review your options.

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