Q: When does the new bankruptcy reform law kick in and how will it affect anyone thinking of filing for bankruptcy?

A: You have until Oct. 17 to file for bankruptcy under the current rules. After that, filing for bankruptcy will likely increase in cost, take longer and could raise your chances of being audited.

It also will be harder to erase your debts.

A vast majority of the 3,000 to 4,000 Hawai'i residents who file for bankruptcy each year opt for Chapter 7 liquidation bankruptcy, which allows them to wipe out most — if not all — of their credit card and other debts relatively quickly.

The new law cuts off that option for many middle-class residents and forces them to file under the more stringent Chapter 13 designation, which puts the debtor on a monthly payment plan that lasts three to five years.

"They are going to make it harder for people to file for Chapter 7," said local bankruptcy attorney Greg Dunn, who noted that his caseload has doubled during the past several months because of the looming changes.

Here's how it works: If you earn more than $65,000 a year — the median household income for Hawai'i — the bankruptcy court automatically places your finances under review in what's known as a "means test," which compares your income with the typical living expenses such as food, housing, and transportation in your state.

If your income exceeds your living costs by $100 a month, the court in most instances will convert your case into a Chapter 13 bankruptcy and you'll be placed on a payment schedule set by the court.

The schedule, in turn, is based on any extra income that you may have after you subtract your typical living costs.

The problem: The payment schedule relies on cost-of-living statistics provided by federal agencies such as the Internal Revenue Service or the Bureau of Labor Statistics. Often times, your actual costs are higher than the standard rate.

For instance, the government could set a consumer's transportation costs at $400 a month when the actual costs may be much higher. It's not unusual here for a debtor to have $300 in monthly car payments, $150 in monthly parking expenses and monthly gasoline expenses of $150.

Lawyers and consumer advocates warn that the new law increases your chances of being audited. About one out every 25 to 30 people who file for bankruptcy protection will be randomly selected for an audit by the bankruptcy court.

Creditors also are entitled to request a copy of your tax returns and can foreclose on your property or garnish your wages even after you filed for bankruptcy if you haven't notified them properly.

You'll also spend more time in bankruptcy court. Unlike most Chapter 7 cases which are resolved within months, Chapter 13 cases take up to five years to complete. The extra time and increased burdens that come with a Chapter 13 filing could significantly increase costs, attorneys said.

Local bankruptcy lawyer Dawn Smith said she charges between $300 and $700 to file a simple Chapter 7 bankruptcy case. A Chapter 13 case — whose fees are partly set by the bankruptcy court — will cost between $1,800 and $3,000, she said.

What's more, the new law requires those who file for bankruptcy to attend debt counseling and take courses in personal finance.

GOT A QUESTION?

If you have a personal finance question, Akamai Money can help. Send questions to David Butts at dbutts@honoluluadver tiser.com or call 535-2453.