It's Your Money: Filing for bankruptcy - WKOW 27: Madison, WI Breaking News, Weather and Sports

It's Your Money: Filing for bankruptcy


MADISON (WKOW) -- There's been 30 percent jump in the number of bankruptcy filings in the first half of this year compared to the first half of last year. 

And that would seem to say a lot about how bad times have become for people, since congress recently made it harder to declare bankruptcy. 

In tonight's It's Your Money report, the bankruptcy option.

Bankruptcy court is a tougher place to plead your case. The popular Chapter 7 that used to allow people to simply dissolve their debt became a much more difficult option when Congress overhauled the bankruptcy laws in 2005.

"There's a new needs-based test put into place on Chapter 7 that will essentially eliminate most middle-class families from being eligible for bankruptcy," UW Extension Financial Specialist Michael Gutter says.

Despite the test, the down economy has resulted in across-the-board jumps in bankruptcies. They're up 30% nationally in the first half of this year compared to last.   Statewide, up 46% in the second quarter of this year compared to 2007, and in Dane County, up more than 38% in the same period.

Besides being a stricter process, bankruptcy is also more expensive.   The US Government Accountability Office says attorneys fees for people who file for Chapter 7 increased by 51% since the new law took effect.   Costs for chapter 13 filings are also up.    In addition, the court fees to file are higher.

There are two types of personal bankruptcy: Chapter 7 and Chapter 13.   Under 7, as we mentioned, debt is erased entirely.   Chapter 13 is a reorganization plan under which creditors get their money, but perhaps over a longer period of time with less interest.

Besides creating a new test for Chapter 7, the new bankruptcy law also requires filers to literally learn a lesson from the experience.

"Prior to filing for bankruptcy, families will need to complete financial education and those being moved into Chapter 7 or 13 will need to work with a financial counselor to actually establish that repayment strategy," Gutter says.

The stricter requirements have also cost the government more money to enforce.   About a third of the money spent to overhaul the bankruptcy laws was spent on implementing the needs-based test.   One cost that continues to be high is the one bankruptcy filers must pay even after the bills are paid.

"The impact, of course, for all bankruptcy is that it will appear on your credit report and significantly impact your credit score for up to seven years," Gutter says.

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