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Debt Forgiveness

If you find yourself in a debt trap, file for bankruptcy and get out of it. That used to be the practice till a few months ago. But not any longer. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which came into effect in October last, have changed everything. It has dealt a severe blow to the mindset of those who grew up with the idea that just filing for bankruptcy would end all their financial troubles.

In fact, there were growing number of complaints from lending institutions and banks about increasing and systematic abuse of bankruptcy by different types of people compulsive shoppers, gamblers etc. So last October, the authorities decided enough was enough and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 were introduced. The law has made potential bankruptcy think more than twice before filing. Now one must be aware of the new rules before deciding whether or not to file for debtforgiveness.

The new law has rectified a fundamental flaw in the bankruptcy system. Many debtors who can have enough money to pay their debts now cannot avoid doing so by filing for Chapter 7 bankruptcy or debt forgiveness. A number of provisions in the new law have been designed to ensure that the bankruptcy courts serve only those who really need them and not abused by those who don't.

However, the new law will continue to be lenient with people truly in need of debt forgiveness.

Debtors with "special circumstances," like a sudden loss of income or extraordinary medical expense, will be allowed to continue to file for Chapter 7 bankruptcy. It will also see to it that debtors earning less than the state's median income and those who cannot afford to pay any of their debts, can still use Chapter 7 and have all of their debts written off.

Bankruptcy test

In case your income is not less than the median income for families the same size of yours in the state you live in, you will have to go through a bankruptcy test and clear it to be eligible to file for debt forgiveness, or Chapter 7 bankruptcy. If it is found that you have at least $100 a month left over after paying for your living expenses and priority payments like taxes, alimony etc., you might have to file for Chapter 13, which requires repayment of part of your debts. Your expenditure will be looked at on the basis of the IRS guidelines on housing and food allowances. According to these guidelines, nearly $200 and less than $800 will be allowed for food, and housing and utilities respectively.

Debtors with serious medical conditions, active military and low-income veterans may get special treatment under the new test.

Credit counseling

In order to know about alternatives other than bankruptcy, debtors have to receive credit counseling within 60 days of filing for bankruptcy. In addition, debtors must also go through a financial literary course before the bankruptcy process is completed and they are 'discharged.' These provisions are aimed at reducing the number of bankruptcies in the future.

Child support, alimony and home equity

The new bankruptcy law gives top priority to women and children. Child support and alimony payments receive priority over other debts in bankruptcy proceedings under the new rules. Previously, some rich filers would conceal millions of dollars in assets from creditors by purchasing an expensive home in a state with an unlimited homestead exemption. The new law has curbed such homestead exemption abuses. According to the provisions of the new law, debtors are bound by the homestead exemption of their prior state of residence until they have lived in the new state for two years compared to the 180 day requirement under the previous law. The upper limit for homestead exemption has been fixed at $125,000 if you purchased your house 40 months before filing for bankruptcy.

Provisions have been also made for random audit of bankruptcy petitions in order to reduce the number of fraudulent filings. With the introduction of this step, it is likely that debtors and their attorneys will accurately disclose income and expenses. Another important step is the lengthening of the minimum time between bankruptcy filings to stop serial filers from abusing the system. It also restricts debtors' ability to load up on luxury items just prior to bankruptcy. Unscrupulous debtors are often known to have abused the system by loading up on non-essential luxury items, with the express intent of discharging this credit card debt forgiveness through Chapter 7 bankruptcy.

Student debt forgiveness

Students can engage themselves in many socially benefiting jobs in order to settle his debt forgiveness. Such jobs include helping in medical clinics, teaching in understaffed schools, enlisting oneself in the military and social service.

Medical students, who have to spend a lot while studying, often have to borrow heavily to continue their studies. These students can provide medical assistance in economically backward, disaster-affected, far-flung or even war-affected regions to get their debt or loan forgiven. As most practicing doctors usually prefer to avoid such areas, recruiters have to depend on such student defaulters in such regions.

Another option open for student defaulters is teaching. Prior to July 1, 1987, defaulters had to teach in schools having a low-income clientele. The rule changed subsequently and after July 1, 1992, they have been allowed to teach in certain subjects in understaffed schools to get their loans waived. Borrowers can also teach in schools with 'special-case' children to have their loans written off.

Enlisting oneself in military peace-time, often menial service is another option available to student borrowers. Many students prefer this for the sense of patriotism it creates and the sheer thrill of working in the military.

However, none of these can provide total loan forgiveness. Normally, students find a 15% waiver in the first and second years, 20% in the third and fourth year and 30% in the fifth year.

You must carefully examine all of your options before seeking debt forgiveness. It is better to consult an experienced bankruptcy lawyer when considering your options.

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