Bankruptcy Reform Act of 2005

Before the 2005 Bankruptcy Act, American households could write off large amounts of bad debt and keep their homes. Lenders pushed for bankruptcy reform as a way to force households to find an affordable way to pay off credit card and other consumer debt, according to "Bloomsberg Businessweek." The new law makes it much harder for households to free themselves from their consumer debt.

Credit Counseling Requirements

• To file bankruptcy, your household must first receive credit counseling and debtor education that is approved by the United States Trustees Office and submit a certificate of completion to the court, as stated on the Find Law website. After filing for bankruptcy, you are required to attend another counseling session to learn personal financial management and provide proof of completion before being awarded a bankruptcy discharge to wipe out your debts.

Restricted Eligibility for Chapter 7 Bankruptcy

• In the past, most people chose to file Chapter 7 bankruptcy over Chapter 13 bankruptcy because Chapter 7 allowed assets to be liquidated. The 2005 Bankruptcy Reform Act, according to the Find Law website, requires individuals to pass a means test to file bankruptcy under Chapter 7. If you have more income than the test allows or if the court believes the system was abused or the case was filed in bad faith, your case will be dismissed unless you agree to pay a portion of your debts under a Chapter 13 reorganization plan.

Chapter 13 Bankruptcy

• Under Chapter 13 bankruptcy, the courts set up a debt repayment plan on secured and unsecured debt lasting three to five years. Filing for Chapter 13 temporarily halts foreclosure proceedings on homes, but the protection only lasts as long as the borrower is making mortgage payments.

Student Loans

• You can only have student loan debt erased if you can prove that repayment of the loan would create an undue hardship on you and your dependents, even if the lender is a commercial entity. This is difficult to prove unless you can show proof of a severe disability, according to the ws5 website.

Bankruptcy Costs

• The new law raised the cost of filing for bankruptcy to discourage households from taking this route to get out from under debt. Henry J. Sommer, president of the National Association of Consumer Bankruptcy Attorneys, estimates the cost of filing for bankruptcy is now roughly $1,400 to $2,400; under the old law, the average cost of filing for Chapter 7 was $800 to $1,400 in attorney's fees and other costs.