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Coping with new bankruptcy law
5 Tips: Consider filing now; don't add risk to your home; more...
April 18, 2005: 1:47 PM EDT
By Gerri Willis, CNN/Money contributing columnist
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Time is running out for those considering filing for bankruptcy. CNN's Gerri Willis shares five tips.
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NEW YORK (CNN/Money) - President Bush is soon expected to sign into law a bill that will make it difficult, if not impossible, for many consumers to wipe away their debts through bankruptcy.

With 1.6 million people filing for bankruptcy each year, the changes will have broad impact. What should you do if the debt you're facing looks like a mountain and you're worried the safety net has been pulled out from under you?

Here are today's five tips.

1. On the fence? File now

Consumer advocates say if you've been considering filing for bankruptcy protection, but have delayed, you should go ahead and start the paperwork now. Once the many elements of the law take effect in 180 days (six months), bankruptcy as we know it will have changed to an unfriendly landscape.

The new law makes it much more difficult for filers with a median income higher than the average to file for bankruptcy. Henry Sommer, President of the National Association of Consumer Bankruptcy Attorneys, says that under the terms of the new law, bankruptcy will become more expensive and more burdensome. Consumers will have to file complicated forms and take credit education courses before even getting to file.

One bankruptcy attorney says consumers are already shopping attorneys. "My phone rang off the hook and I expect others had the same experience," says Bill Brewer, an attorney in Raleigh, N.C. Both Sommer and Brewer advised that consumers who are trying to figure out whether bankruptcy is for them hire an attorney who specializes in bankruptcies.

2. Keep the house

If you're thinking about taking out home loans to avoid bankruptcy, you might want to rethink that strategy. By adding debt to your home, you are putting it at risk. Sommer says he's seen people who too out home loans and then filed for bankruptcy, get into serious trouble.

That's because bankruptcy does not excuse you from paying your mortgage. If you're in serious debt trouble and can't meet your mortgage obligations while under bankruptcy protection, you could lose your home.

Another reason that you shouldn't take home loans to pay off your debt: you're likely to pay an extremely high interest rate, which could aggravate your situation.

Plus, institutions may be looking to take advantage of you. Sommer says that consumers struggling financially should avoid any institution offering "debt consolidation mortgages" -- that's code for predatory loans. Sommer advises talking to a bankruptcy attorney to see if filing is right for you, before you put your house at risk.

3. Watch out for con artists

Many consumers deep in debt consider hiring a credit counselor to help clean up the mess and get their credit straightened out. And the new bankruptcy code will require you to see one.

Unfortunately, there is a rash of scammers out there willing to prey on those who really need help fixing their credit. The Federal Trade Commission is undergoing a major investigation into several cases of consumer fraud. Their recommendation is that you check out credit counseling services with your state's attorney general's office and the Better Business Bureau.

The FTC also offers a guide to finding a legitimate credit counselor on their Web site, as well as a "Self-Help Guide" to fixing your credit.

4. Get good advice

Remember, a credit counselor is just that. If you are hoping for advice on whether or not to file for bankruptcy: consult a bankruptcy attorney.

Experts say you'll need a sharp one to navigate the new bankruptcy seas. Start by pointing your browser to the Web site of the National Association of Consumer Bankruptcy Attorneys, where a tool on the home page can link you to an attorney near you. Don't stop there, however. Be sure to check out any attorney you hire with your state attorney general's office or bar association.

5. Call to all

The new bankruptcy law should persuade all Americans to take control of their debt. The primary cause of debt problems for many Americans is credit cards. The average credit card balance is $12,000. And 10 to 15 percent of households with credit card debt are barely able to pay it off, says Steven Brobeck, executive director of the Consumer Federation of America.

For that reason, you'll want to lower credit card balances and keep a close eye on your credit reports from companies like Equifax, TransUnion and Experian.

How do you know if you're in trouble? One rule of thumb: If you can't develop a plan to pay off your credit card debt in a year and at the same time meet your other debt obligations, you probably need help.

The consequences of not monitoring that debt, says Brewer, can be severe. "What this law does is say to people your responsibilities are first to pay MBNA and Citibank and maybe we'll leave enough to provide for your children," he says.

More on bankruptcy and debt:

Fees could soar

Understanding the new bill

Money magazine's nine-step program for getting out of debt


Gerri Willis is a personal finance editor for CNN Business News and the host for Open House. E-mail comments to 5tips@cnn.com.  Top of page

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