NEW YORK, NY - By a vote of 302 to 126, on April 14, 2005, the U.S. House of Representatives passed a bankruptcy reform bill which will become, for the most part, effective 180 days after it is signed into law by President Bush on April 20. The reform bill, which has stalled in Congress for more than seven years, will make filing for bankruptcy more difficult and costly, and will enhance the rights of creditors.

According to Michael L. Moskowitz and Richard E. Weltman, bankruptcy attorneys closely following the reform legislation, "anyone thinking about filing for bankruptcy protection to discharge debts, should not wait since the new law, once effective, will prohibit many people now eligible for bankruptcy relief under chapter 7, from filing." Moreover, it is likely that experienced bankruptcy lawyers will need to substantially increase their fees because of new responsibilities thrust upon them by the reform law.

Debtors will not only be obligated to seek pre-petition credit counseling before they may file, but they must pass a "means" test to qualify for chapter 7 relief. The net result, according to Moskowitz, is there will be many more chapter 13 petitions filed as most consumers, unless unemployed or with minimal income, may not qualify for chapter 7 relief previously available.

Under current law, most consumers opting for bankruptcy file chapter 7. In a chapter 7 case, one's assets not exempt under either federal law or state law, are liquidated and given to creditors, while most of the debtor's debts are discharged. This provides the debtor with what is known as a "fresh start." In 2004, over 1.1 million people filed for chapter 7, accounting for roughly 72 percent of non-business bankruptcies. Since many chapter 7 filers don't have assets that qualify for liquidation, credit card companies and other creditors sometimes get nothing.

A chapter 13 case, currently utilized by less than 20% of consumer filers, is a repayment plan that may be extended for a period of up to five years. Any debts not addressed by the repayment plan don't have to be paid. Last year there were 445,574 chapter 13 petitions filed.

Once the legislation passed by Congress becomes law, fewer consumers will be eligible to file under chapter 7. Many more will be compelled to file under chapter 13 than currently do so. Debtors or creditors considering their options, and wondering how the new law might affect their rights, should contact an experienced bankruptcy practitioner as quickly as possible to learn how the new law will affect them.

Michael L. Moskowitz and Richard E. Weltman are members of Weltman & Moskowitz, LLP, having offices for the practice of law in New York and New Jersey. The firm handles cases involving bankruptcy and creditor's rights, business litigation, technology law, real estate, and other dispute resolution and transactional matters. They can be reached at 212.684.7800 or 201.794.7500 or by e-mail.