The path into bankruptcy is now rougher, the path out is steeper, and the change could hardly come at a more difficult time for many US consumers.
An overhaul of the bankruptcy code - which takes effect Monday - means that Americans will face higher fees and higher burdens of proof before having any debts wiped clean in court.
The law aims to encourage more responsible behavior by a debt-drenched nation, and to rein in abuses of bankruptcy protection.
The motive is laudable, many say. But the new law also creates additional burdens for many Americans at a time of rising pocketbook challenges. Energy prices have surged. Interest rates are rising. Credit-card firms are boosting rates for high-risk customers while raising minimum payments.
And a trend of rising home values, which has helped sustain consumer spending, may be slowing. "If that goes ... you've got a very combustible situation," says Brad Stroh, who heads Freedom Financial Network in San Mateo, Calif. "We think the fourth quarter could be very, very difficult for the American consumer."
Consumer spending now drives more than two-thirds of US economic activity, and an era of low interest rates has helped borrowers do much of that spending.
Now the climate appears to be shifting. Even as the price of goods accelerates, so is the price of borrowing.
At the same time, the hurdles for people who get into financial trouble just got higher.
By making bankruptcy tougher, the new law affects more than 1 million people annually who typically face a combination of debt and dire straits, such as illness, a job loss, or divorce.
"In some ways it's going to affect everyone who files for bankruptcy, because the cost is going to go up," says Deborah Thorne, an Ohio University sociologist who has researched bankruptcy.
Lawyers may charge another $500 or so because of new paperwork requirements. And the government's fee for a Chapter 7 filing is now $274, up from $209.
But the law's main impact is targeted toward those with reasonably strong incomes. Its core feature is a means test, designed to steer more of these people toward Chapter 13 bankruptcy (in which they pay what they can to creditors over a five-year period) rather than Chapter 7 (which quickly eliminates many debts).
Between the means test and higher bankruptcy fees, the result could be to discourage some people from filing for protection from creditors. The ranks of those "underground" - struggling to avoid creditors and get by - could grow. Others would achieve greater financial discipline, in or out of court.
Here's how the new system compares with the old:
Until now, the system relied strongly on a judge's discretion. Petitions for Chapter 7 could be accepted or rejected, but there was no standard means test.
The new system has a multistep test for entering Chapter 7. First, the filer's family income over the past six months is considered. If it's below the state median, Chapter 7 is available. If it's higher than the median, the court will examine the filer's ability to pay debts. The judge considers whether, after allowing for living expenses, the filer can pay at least $100 a month to creditors - and whether within five years the total payments can reach either $10,000 or 25 percent of unsecured debts (such as credit cards).
If so, the door to Chapter 7 slams shut. Probably. The law also provides for extraordinary circumstances to qualify people for Chapter 7 protection. A severe illness is one example. Another is hurricane Katrina. Storm victims are being given some extra leeway.
Some data suggest that 15 percent of Chapter 7 filers may be above the median income in the states where they live, says Nathalie Martin, a scholar at the American Bankruptcy Institute in Washington. But it may be only about 5 percent, she reckons, who actually get bumped out of Chapter 7 by the new law. Still, for those affected, the shift is significant.
If they file under Chapter 13, a judge will determine how much of their income they can use for living costs - a budget now based on formulas developed by the Internal Revenue Service. The rest will go to creditors, generally for a five-year period. It can be a grueling financial workout, judging by the two-thirds dropout rate of debtors who try to navigate Chapter 13.
Creditors, including the bank-card industry, lobbied for years to get the new law through Congress. But in the end, America's bankruptcy woes are partly the making of lenders themselves, some observers say. Lenders aggressively market everything from credit cards to interest-only home loans, and bankruptcy rates have risen in proportion with consumer debt.
"Bankruptcy filings were up, but nowhere near as much as credit-card profits," Brad Botis, an Alabama bankruptcy attorney, said Friday as he raced to help people rushing to file before the law took effect.
The legal change comes alongside voluntary steps by the industry to crack down on delinquent payers. In the past year, it has become common for consumers to see interest rates rise on all of their cards if they miss a payment on one, for example.
Another change, forced on consumers by the federal government, will test borrowers' wherewithal starting this winter. New rules require sizable minimum-payment hikes, to make sure each monthly payment covers at least 1 percent of the balance on a card.
"The end goal is a good one" - to help people avoid years of debt buildup, says Mr. Stroh, whose firm tries to help people avoid bankruptcy. "The unfortunate consequence is that some people living month to month are suddenly in serious trouble."
• The law's centerpiece is a means test, intended to force more bankruptcy filers to pay what they can to creditors (Chapter 13 status), rather than allowing them to wipe out debt quickly (Chapter 7 status).
• People must get credit counseling before filing, a move that may help some avoid bankruptcy.
• No one can exit bankruptcy without taking a course in managing finances.
• Some types of debt, such as certain education loans, have been added to a roster of obligations that cannot be erased through bankruptcy.
• Bankruptcy attorneys can face penalties if petitions contain incorrect information about a client's finances.
• To crack down on "serial filers," an individual can file under Chapter 7 only once in eight years (up from six years).
• The law will help curb abusive practices, from big ones (such as buying an expensive home to use it to try to shield assets from creditors) to small ones (such as buying a luxury item just before entering bankruptcy).