Recent changes in bankruptcy law make it harder for some to file for bankruptcy:
On April 20, 2005, a new bankruptcy law was enacted which made several changes to the U.S. Bankruptcy Code. The law is named The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Also known as "the New Bankruptcy Law", it was passed by the 109th U.S. Congress and signed by President George W. Bush. While BAPCPA covers both business and consumer bankruptcy, this article specifically addresses the law's effects on consumer bankruptcy.
Many people were filing for bankruptcy under Chapter 7 as a way to avoid paying off their debts to creditors. People preferred to file under Chapter 7, known as "liquidation bankruptcy", because debts are completely forgiven and discharged in this category. As a result, the BAPCPA was designed to prevent such abuse of the bankruptcy process. The law accomplishes this by changing many of the Chapter 7 filling requirements.
As Chapter 7 filing becomes more difficult, people are then forced to file instead under Chapter 13, known as "repayment plan bankruptcy". Under Chapter 13, debtors are allowed to repay their creditors over a specified period of time. Often times a court will lower the payments to make them more affordable, but the main point is that Chapter 13 debts must be repaid. Thus, the underlying intentions of the Act are to prevent abuse of the system and to get more people to pay off their debts.
BAPCPA makes the following changes to Chapter 7 and Chapter 13 Bankruptcy:
Eligibility for Chapter 7: "Abuse" of the Process
Before BAPCPA was enacted, any person with any level of income could file for Chapter 7 bankruptcy. BAPCPA now limits the number of people filing under Chapter 7. It does this by allowing courts to dismiss a claim if: the debt is mainly consumer debt (such as credit card debt) and relief would abuse the Chapter 7 process. Finding "abuse" is a main focus of the Act. The court may find abuse in two different ways:
"Showing of bad faith": The court will find abuse if the person or married couple has exercised bad faith in the filing of their Chapter 7 documentation. The court determines this through "a totality of the circumstances", examining such factors as the existence of fraud, etc.
"Presumption of Abuse"- Alternatively, if there is no showing of bad faith, the court can presume that a person has abused the process. It does this by applying the "means test", which makes certain calculations based on monthly income. This is the more common procedure.
In short, this law makes it easier for courts to make a finding of abuse. Prior to BAPCPA, the language of the Bankruptcy Code required that courts make a showing of "substantial abuse" before denying a claim. BAPCPA changes this and instead allows courts to presume abuse. Bankruptcy courts apply the following "means test" to determine presumptive abuse.
Triggering the "Means test"
As stated above, prior to BAPCPA anyone from any income level was eligible to file for bankruptcy under Chapter 7. Under the new law, if the person's monthly income is higher than the state median income, then the court will apply the means test to determine if there is a presumption of abuse. It is helpful to consider the monthly income as a "trigger" for the means test- the income will trigger the means test only if it is higher than the state median. Also remember that if the debt is not primarily consumer debt, then the means test is inapplicable.
How the "Means Test" Works
The exact calculations and computations under the means test are complicated. It involves many adjustments; for example, figures can vary based on family size. The way it generally works is as follows:
The court will calculate the person or couple's "current monthly income" using various timetables and comparisons with the state medians. After determining current monthly income, the figure is reduced by the value of certain itemized deductions specified by the IRS (also called "presumed expenses"). An itemized list of deductions is found within the statute itself.
After reducing the current monthly income by the deductions, a presumption of abuse is found if:
1) The person's current monthly income after deductions, added up over a period of five years is greater than $10,000,
2) The person's current monthly income after deductions, added up over a period of five years amounts to 25% of the debt they owe (this total must be at least $6,000).
The reasoning behind the means test is this: if your income is over a certain level, then there is no need to file for liquidation bankruptcy. This is especially true in #2, above. If you can pay back at least 25% of your debts, then you should be filing under Chapter 13 repayment bankruptcy rather than Chapter 7 liquidation bankruptcy.
If the court makes either a finding of bad faith or a presumption of abuse, they will deny the Chapter 7 application. They will then consider whether to allow the person to file under Chapter 13.
As you can see his can get complicated. As stated, this is a general overview; consult a lawyer if you are filing under Chapter 7 and you believe that you may be subject to the means test.
Rebutting the Presumption of Abuse
In limited cases, a person may rebut the presumption of abuse. They may do so only by a showing of "special circumstances" such as a serious medical condition or a call to active duty in the armed forces.
Also, remember that only those whose monthly income is higher than the state median will be considered for the means test. For those whose income is lower than the state median, courts are not even allowed to begin the process of presuming abuse. This effectively creates a safe harbor for those with low income, although they may still be subject to penalty under other circumstances such as bad faith.
Other Effects of the BAPCPA
BAPCPA has affected bankruptcy law in other numerous and widespread ways. Some of the more popularly discussed effects of the law are:
Waiting Period between filings: BAPCPA increases the number of years that a person must wait in between filling Chapter 7 cases. Under BAPCPA, the period has increased from 6 to 8 years in between filings. The law has also imposed new waiting periods in between the fillings of Chapter 13 cases in some cases.
Mandatory Credit Counseling: Under BAPCPA, applicants must now obtain credit counseling before filling for Chapter 7 bankruptcy. This must be done 180 days before filing and the counseling must come from an approved agency. This requirement did not exist before the act.
Automatic Stay: Automatic stay is a court procedure that instructs creditors to stop collecting from debtors until the proceedings are completed. BAPCPA limits the availability of this procedure based the number of times a case is filed.
Non-dischargeable debts: The new law also makes more types of debts "non-dischargeable" (i.e., the debt cannot be forgiven and must be repaid). Examples of non-dischargeable debts are student loans and money lent by private lenders. Thus, more types of debts are shifted from Chapter 7 to Chapter 13 status.
Chapter 13 Bankruptcy: BAPCPA also changes the way that courts calculate total repayment debt using disposable income and other figures. Previously, judges had much discretion in determining their calculations. Under the Act, judges must now follow stricter guidelines set forth by the IRS.
As you can tell, the BAPCPA has made Chapter 7 Bankruptcy requirements more rigorous and demanding. The Act has received an enormous amount of criticism from various sectors of the economy. Many claim that the new law makes the bankruptcy process more burdensome.
Some feel that in the end they spend more money due to the new requirements, such as the mandatory credit counseling and longer waiting periods. Those in favor of the Act point out that people should repay their loans in the first place rather than clog the system with frivolous claims. Again, if you feel that you have a bankruptcy claim or need advice on these matters, consult with a lawyer who will help you work out the details of your particular case.
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