Changes pushed by banks, stores, card companies

WASHINGTON — The most sweeping rewrite of the U.S. Bankruptcy Code in a quarter century, making it harder for debtors to erase credit card and other obligations in court proceedings, goes into effect Oct. 17. The legislation was passed by Congress and signed into law by President Bush in April after an eight-year campaign by banks, retailers and credit card companies.

A major provision of the law sets up an income test for determining whether people can have their debts canceled in exchange for forfeiting certain assets or if they must repay them under a court-ordered plan. The change will affect an estimated 30,000 to 210,000 people a year, and there already has been a rush to the courthouse by those wishing to file for bankruptcy under the current law, which generally allows federal bankruptcy judges leeway to determine the fate of debtors' assets and how much they must repay.

Financial services companies and other proponents of the change have maintained that the bankruptcy process has been abused by gamblers, compulsive shoppers and multimillionaires who buy mansions in states with liberal homestead exemptions to shelter assets from creditors. They say the abuse has resulted in higher interest rates for everyone else.

Opponents have said the new law will fall especially hard on low-income working people, single mothers, minorities and the elderly and will remove a safety net for those who have lost their jobs or face mounting medical bills.

Among the changes made by the new law:

• It sets up a new test for measuring a debtor's ability to repay. People with insufficient assets or income can still file a Chapter 7 bankruptcy, which if approved by a judge erases debts entirely after certain assets are forfeited. But those with income above their state's median income who can pay at least $6,000 over five years — $100 a month — will be forced into Chapter 13, under which a judge orders a repayment plan.

In calculating income, people filing for bankruptcy may deduct various expenses as defined by the Internal Revenue Service, including food and clothing, and some health and disability insurance expenses.

• People seeking bankruptcy protection are required to take credit counseling courses within 180 days, or about six months, of filing.

• It gives priority to a spouse's claims for child support among creditors' claims on a debtor in bankruptcy.