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Clark Howard's Tips

Bankruptcy laws get tougher

February 21, 2005

For the past seven years, the U.S. Congress has tried to change the bankruptcy laws to make it more difficult for individuals to erase their debts. Typically, that is a Chapter 7 bankruptcy when your debts disappear and you start over.

But Congress is very close to passing a bankruptcy law that involves a "means" test. This means that if your income is at or above the average for your area, you will not be permitted to file a regular bankruptcy. Instead, you'll have to work out a plan with your creditors.

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It's almost sure to pass both houses, and there will be a new day involving debt.

Consumer debt has surpassed $2 trillion collectively, and about one in every 70 families files for bankruptcy each year. For years it was a life-changing event that caused someone to file bankruptcy. Medical bills, divorce or other life changing circumstances often trigger financial crisis.

But more and more it's just debt that we can't seem to escape. People buy too much, get lost in bills, which causes interest rates to go up. And the black hole seems impossible to crawl out of.

Many consumers are paying between 20 and 35 percent interest on credit cards, so it's hard to keep your head above water.

Do not impulse buy! You can easily slip into debt, and filing for bankruptcy won't be an easy way out anymore.

More Clark Howard Credit and Banking Tips The dangers of home-equity borrowing  ID checks, minimum purchase rules a no-no with credit cards  The Mortgage Lender Implode-O-Meter  Advance-fee loans are back with a vengeance  Wachovia, WaMu say goodbye to option payment loans  Cycling your unused credit cards back into the mix  Banks offer diverging interest rates on savings and CDs  Mortgage bailout proposal to help banks, not homeowners  Credit limits being reduced without your knowledge?!  65 million paying for credit monitoring/fraud alert services  Full list