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What the new bankruptcy law would do

WASHINGTON—The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which passed the Senate on Thursday and is expected to pass in the House of Representatives, limits who can qualify for bankruptcy under Chapter 7 of the bankruptcy code. Chapter 7 is a popular provision with many bankruptcy filers because it permits them to erase their debts after forfeiting their assets.

The new legislation would:

_Allow bankruptcy petitioners who earn less than the median income of their state to file under Chapter 7. Those who earn more and can repay at least $6,000 over five years could file only under Chapter 13 debt reorganization, which requires some repayment.

_Require bankruptcy petitioners to pay for and undergo credit counseling within 180 days of filing.

_Extend from six to eight years the time that must pass before a debtor who's received a Chapter 7 discharge can get another.

_Disallow Chapter 13 discharges if the debtor filed for bankruptcy under Chapters 7, 11 or 12 within four years of the Chapter 13 filing or within two years of a previous Chapter 13 filing.

_Limit state homestead exemptions to $125,000 if the debtor bought the residence within 40 months of filing. However, Florida, Iowa, Kansas, South Dakota and Texas have unlimited homestead exemptions that protect expensive homes from creditors.

For more information about the legislation, see the report by the Congressional Research Service at www.abiworld.org/pdfs/s256/CRS-S256.pdf.

Bankruptcy can liberate people in desperate financial straits, but it has serious side effects. Filings can stay in your credit report for up to 10 years, which can keep you from getting a loan, an apartment or even a job.

Financial counselors advise people facing possible bankruptcy to:

_Prepare a budget and stick to it. Try to make sure your income exceeds your expenses.

_Stop spending. Entertainment, unnecessary clothing and other luxuries should be the first to go. Avoid using or tear up credit cards. Use cash whenever possible.

_Get financial advice. You may be able to consolidate your bills into one monthly payment or find an alternative to bankruptcy.

For more information, go to these Web sites:

Debt Counselors of America, www.dca.org

Consolidated Credit Counseling Services Inc., www.debtfree.org

American Bankruptcy Institute, www.abiworld.org

Bankruptcy.org, www.bankruptcy.org

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(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20050309 BANKRUPTCY

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