For most people of course, bankruptcy is very much a last resort, to be considered only after all other debt consolidation and debt reduction options have failed. Even so, the new bankruptcy laws passed in 2005 mean that filing for bankruptcy is now much more complicated, and for many people much more expensive that it had been before the new laws went into effect.

Just what has changed?

Perhaps the biggest change that was instituted in the world of bankruptcy laws is the introduction of a two part means test. The results of this means test are used to determine which of the two forms of bankruptcy the individual must use.

The first part of the means test uses a formula to find out if the individual can afford to pay at least 25% of the non-prioritized unsecured debt that is owed. This non-prioritized unsecured debt includes debt such as credit cards. The formula takes into account and exempts necessities like food and rent, but it can be fairly restrictive.

The other part of the new means test is to compare the income of the bankruptcy filer to the median income for his or her state. Those who are found able to pay back at least 25% of the unsecured debt they owe, and whose income exceeds the state median, will be required to file for bankruptcy under the more restrictive Chapter 13 law, and they will be ineligible for the more generous rules of a Chapter 7 filing.

Whats the difference?

There are considerable differences between the two forms of bankruptcy filing, and the difference can add up to thousands of dollars. With a Chapter 7 bankruptcy filing, the debtor has all of his or her assets, except for those which are exempted by the state, liquidated, and the proceeds are used to pay off the creditors. If the amount of debt exceeds the proceeds of the assets, the remaining debts are cancelled, leaving the creditors holding the bag.

With a Chapter 13 bankruptcy filing, on the other hand, the debtor is required to complete a court mandated payment plan, lasting up to five years. Any debts that have not been repaid by the end of that predetermined period are cancelled.

As you can see, the Chapter 13 bankruptcy filing is quite a bit more restrictive, and it typically means that a greater percentage of the total debt must be repaid. It is important for any debtor considering a bankruptcy filing to look at his or her own situation, and apply the means test to determine which filing status he or she is likely to fall into. Being an informed consumer has never been more important.