The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 went into effect Monday, providing stricter guidelines on how consumers file for bankruptcy. I will go over some of the new changes and explain what that could mean for you as a consumer, but first let me give some background on bankruptcy itself.

The average person filing for bankruptcy earns just $22,000 per year and a majority of filers have been unemployed for a sufficient period before filing, according to a 1999 study by federal bankruptcy judges. On top of that, according to a Consumers Union report, medical or job related problems were behind 85 percent of the elderly bankruptcy filing, while single mothers also make up a large portion of bankruptcy filings. The change will drastically affect those who are unemployed, injured or over their head in debt.

The act changes the classifications for filing between Chapter 7 and 13 bankruptcies, among other things. For those who do not know, when a person files for bankruptcy, they usually file under the Chapter 7 or 13 classifications. The difference between these two filings stems from your ability to pay back debt.

In Chapter 7 bankruptcy, all of the assets you own are sold (except those exempted by the state) and paid to the creditors, while the majority of the remaining debt is cancelled, otherwise known as a ‘fresh start.’ In a Chapter 13 bankruptcy, the consumer is put on a repayment plan to creditors for up to five years while all the debts not listed on the plan are cancelled. According to CNNMoney.com, 1.1 million people filed for Chapter 7 bankruptcy last year, while only 40 percent of that number filed for Chapter 13.

Since too many consumers abused the old law by filing under Chapter 7 to escape debt they could still pay, the act changed the requirements that consumers had to have in order to file for Chapter 7.

The new law requires consumers to meet two requirements in order to file for Chapter 7. The first such requirement is inability to pay 25 percent of your credit card bills and other ‘non-priority’ debt. The second requirement is not earning the state’s median income. If both of these requirements are met, the consumers are allowed to file for Chapter 7. However, if either one of these requirements is not met, then they must file for Chapter 13, unless the court deems “special circumstances,” enabling them to file for Chapter 7.

I personally hope none of you ever have to go through a bankruptcy, as it is very costly in not only money but also in your credit rating. This new law makes it harder for consumers to pay off their debt while protecting the credit industry. However, if consumers were taking advantage of the old law, then I believe a change needed to be made. I like the benchmark requirements for being able to file for bankruptcy. Even if a consumer does not meet either requirement but shows special circumstances, the judge still has the right to award a Chapter 7 filing. Fortunately, Hurricane Katrina is considered “special” and its survivors are allowed to file under Chapter 7.

Stock Pick of the Week

This week’s pick is Citigroup (C) after they reported earnings on Monday. The fact that they met analyst expectations even after the Katrina effect and the new change in bankruptcy laws persuades me to recommend this growth stock. Citigroup’s price/earnings ratio sits at an inexpensive 11.05, while its earnings per share is a sporty 4.04. Their dividend yield is a respectable 3.90 percent, and their stock is down 10 percent from the 52 week high in January. Price: $44.89.

Jeffrey Lipsey is a senior in Business. His column appears on Thursdays. He can be reached at [email protected].