New rules make it harder to file Chapter 7, carry credit card debt | The Honolulu Advertiser

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New rules make it harder to file Chapter 7, carry credit card debt | The Honolulu Advertiser | Hawaii's Newspaper

Posted on: Thursday, December 22, 2005

New rules make it harder to file Chapter 7, carry credit card debt

By Michelle Singletary

Can it be another year is nearly over?

Typically at the end of December, I like to reflect on my personal financial life. I take stock of whether I followed all the advice I got during the year from my financial adviser.

Year-end also is a time to catch up on what's happened in personal finance.

Here are some noteworthy money matters from 2005:

New bankruptcy rules. It's now harder to declare yourself broke. Under the law that went into effect this year, debtors have to meet a means test to be eligible for Chapter 7. Under the old bankruptcy rules, most people decided for themselves which type of bankruptcy they wanted to file. Most chose Chapter 7, where you can generally wipe out all your unsecured debt. Now more people may have to file a Chapter 13 bankruptcy, in which you have to pay back some of your debts.

Minimum credit card payments increased across the board. Federal regulators ordered credit card issuers to increase the minimum monthly payments consumers have to make. Regulators want banks and other financial institutions to require that cardholders cover at least 1 percent of their outstanding balance each month, in addition to any finance charges or fees owed.

Why the change? See next year-end development.

Savings rate falls below zero. In October, the U.S. Department of Commerce reported a negative national personal savings rate of 0.7 percent. That means people are spending more than they make by using credit cards, borrowing against the equity in their homes, tapping their savings or selling assets, such as stocks. "Americans are not saving as much as they used to and this spells potential disaster (in) the future," said Phillip Fournier, vice president of Legacy Advisors, an investment management and financial planning firm based in McLean, Va.

I had a reader ask if it was OK to take out a home equity line of credit instead of creating an emergency savings fund. His theory was if he got into financial trouble, he could draw down on the line of credit.

He could do that.

But the point of having a savings cushion is so that it can carry you through a financial disaster or hardship using your own money — not borrowed money. That line of credit the reader wanted to establish should be his second line of defense, not his first. As a goal, save enough to cover at least three months of living expenses. Six months is even better.

Investing in life cycle mutual funds was up. Assets in life cycle funds have more than doubled since 2000, making it one of the fastest-growing parts of the mutual fund world. Life cycle funds were added this year to the federal government's Thrift Savings Plan and have become a huge hit.

Life cycle funds are a way to diversify your retirement savings plan by relying on professionally determined investment mixes that are tailored to when you think you will need the money.

Surveys show people often don't change their asset allocations once they sign up for a retirement plan because they don't know what to do. Investing in a life cycle fund is essentially like putting your retirement account on automatic pilot — except there is a pilot, it's just not you. And we all know that saving for retirement is going to be important since there is a projected shortfall in Social Security in the near future.

If time is money, I hope in 2006 you'll take the time to learn more about personal finance.

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