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Guide To Understanding The Bankruptcy Abuse Prevention & Consumer Protection Act

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Pub.L. 109-8, 119 Stat. 23, enacted 2005-04-20), providing for significant changes in Bankruptcy in the United States, was passed by the 109th United States Congress on April 14, and signed into law by President George W. Bush on April 20, 2005. Most provisions apply to cases commenced on or after October 17, 2005. Referred to colloquially as the "New Bankruptcy Law", the Act of Congress attempts to make it more difficult for consumers to erase debt by forcing more people to file under Chapter 13 rather than Chapter 7.

Provisions

The Bankruptcy Abuse Prevention and Consumer Protection Act made sweeping changes to American bankruptcy laws, affecting both consumer and business bankruptcies. Many of the bill's provisions were explicitly designed by the bill's Congressional sponsors to make it "more difficult for people to file for bankruptcy. Some of the bill's more significant provisions include the following:

Means Test For Chapter 7

The new law makes it considerably more difficult for individuals to file for bankruptcy under Chapter 7, under which most of their debts are forgiven (or discharged), as opposed to Chapter 13, under which no debts are forgiven. Under the old law, filers had a presumption of eligibility to file under Chapter 7, with the final determination made by bankruptcy judges, who evaluated the specific nature of each bankruptcy. In lieu of this judicial discretion, the new law substitutes a means test to determine whether filers have enough income to pay some portion of their debts, and thus file under Chapter 13.

The means test applies to filers whose gross income (based on the six month period prior to filing), is above the median income in their state (ranging from $72,451 in Massachusetts to $42,290 in West Virginia, as of 2005). Individuals whose incomes are below the median automatically qualify for Chapter 7. Filers whose incomes are above the median must then calculate their Disposable Monthly Income (DMI) to determine whether they are able to make payments on their debts sufficient to qualify them for Chapter 13. The DMI is determined by subtracting priority debt payments, secured debt payments, Internal Revenue Service determined expense allowances, taxes and certain other expenses from a filer’s monthly income. If the DMI is less than $100 per month, they are permitted to file under Chapter 7. If the DMI is above $100, they must file under Chapter 13.

This formula effectively rewards filers with assets that are heavily mortgaged and debtors with larger amounts of unsecured debt. Since alimony and child support payments are "priority debts" it also has the effect of making it easier for people who owe back domestic support obligations (such as "deadbeat dads") to file under Chapter 7 than other debtors (but the child support is not dischargable).

Additional Requirements For Filers

The new law adds a number of new requirements for bankruptcy filers making the filing process more difficult and costly. These additional requirements include:

  • Mandatory credit counseling and debtor education. All potential bankruptcy filers must now undergo credit counseling via an “approved nonprofit budget and credit counseling agency” prior to filing for bankruptcy. Chapter 13 filers must also complete a course in “personal financial management” prior to filing for bankruptcy.

  • Additional filing requirements and fees. The new law increases the amount of paperwork involved in filing and raises the filing fees. The law also allows filing fees to be waived for debtors earning below 150 percent of the federal poverty level.
  • Increased attorney liability and costs. Attorneys representing bankruptcy filers are now required to conduct an investigation of their clients' filings and can be held personally liable for inaccuracies. Most bankruptcy attorneys predicted that this will result in increased attorneys fees and will make attorneys less likely to take on some cases. In addition, bankruptcy filings are now subject to audit in a manner similar to tax returns.

  • Fewer automatic protections for filers. The new law eliminates some of the protections bankruptcy filers previously enjoyed, such as stopping or delaying evictions, avoiding driver's license suspensions, and delaying child support proceedings.

  • Increased compliance requirements for small businesses. The new law increases the bureaucratic compliance obligations and shortens the deadline for Chapter 11 reorganizations involving small businesses, a series of new requirements not applicable to larger businesses.

  • Increased amount of debt repayment under Chapter 13. The new law made several changes that effectively increased the amount of debt that Chapter 13 filers will have to repay. Most prominently, Chapter 13 payment plans are now five years long, as opposed to three years under previous law. In addition, the "super discharge" provision, which allows filers to discharge many of their debts under Chapter 13 in return for agreeing to a payment plan, is significantly curtailed under the new law.

  • Increased length of time between discharges. The new law increases the length of time from six to eight years between which a filer can receive a Chapter 7 discharge.

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