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Sweeping new bankruptcy law takes effect Oct. 17
The Norman Transcript

AP Business Writer

WASHINGTON The most sweeping rewrite of the U.S. Bankruptcy Code in a
quarter century, making it harder for debtors to erase credit card and other
obligations in court proceedings, goes into effect Oct. 17. The legislation
was passed by Congress and signed into law by President Bush in April after
an eight-year campaign by banks, retailers and credit card companies.

A major provision of the law sets up an income test for determining whether
people can have their debts canceled in exchange for forfeiting certain
assets or if they must repay them under a court-ordered plan. The change
will affect an estimated 30,000 to 210,000 people a year, and there already
has been a rush to the courthouse by those wishing to file for bankruptcy
under the current law, which generally allows federal bankruptcy judges
leeway to determine the fate of debtors' assets and how much they must
repay.

Financial services companies and other proponents of the change have
maintained the bankruptcy process has been abused by gamblers, compulsive
shoppers and multimillionaires who buy mansions in states with liberal
homestead exemptions to shelter assets from creditors. They say the abuse
has resulted in higher interest rates for everyone else.

Opponents have said the new law will fall especially hard on low income
working people, single mothers, minorities and the elderly and will remove a
safety net for those who have lost their jobs or face mounting medical
bills.

Among the changes made by the new law:

It sets up a new test for measuring a debtor's ability to repay. People with
insufficient assets or income can still file a Chapter 7 bankruptcy, which
if approved by a judge erases debts entirely after certain assets are
forfeited. But those with income above their state's median income who can
pay at least $6,000 over five years ? $100 a month ? will be forced into
Chapter 13, under which a judge orders a repayment plan.

In calculating income, people filing for bankruptcy may deduct various
expenses as defined by the Internal Revenue Service, including food and
clothing, and some health and disability insurance expenses.

People seeking bankruptcy protection are required to take credit counseling
courses within 180 days, or about six months, of filing.

It gives priority to a spouse's claims for child support among creditors'
claims on a debtor in bankruptcy.

The law allows for special accommodations for active-duty service members,
low-income veterans and those with serious medical conditions in the new
income test for bankruptcy applicants.

The law supersedes the unlimited homestead exemptions in states including
Florida, Iowa, Kansas, South Dakota and Texas that allow wealthy people to
file for bankruptcy and keep their mansions sheltered from creditors. The
law limits the exemption to $125,000 if the person in bankruptcy bought his
or her residence less than three years and four months before filing.

It also requires billing statements for credit card accounts to include an
example of how long it would take to pay off a balance at a specific
interest rate if only minimum payments are made.

The law also makes it tougher for businesses that file for bankruptcy
protection:

The law limits the exclusivity period, the 18-month span during which a
company in Chapter 11 has the sole right to propose a reorganization plan.
Debtor companies are no longer given unlimited extensions of the exclusivity
period.

It limits the ability of companies to give lucrative pay packages as a way
of retaining top executives.

Companies must decide within 210 days, or seven months, whether they will
keep or relinquish leases on property.

Creditors can seek to have a Chapter 7 liquidation filing dismissed or
converted to a debt reorganization plan under Chapter 11.