The most recent major revision of the bankruptcy code was the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which effectively made it more difficult for individuals to file Chapter 7 bankruptcy, pushing them into Chapter 13 instead.
The BAPCPA was passed in response to a perceived increase in abuse of bankruptcy protection by consumers to wipe away credit card debt. The law was heavily promoted by the financial services industry, which claimed that many consumers were running up credit card and other unsecured debt just to walk away from them by filing Chapter 7 bankruptcy, under which most debts are erased after the liquidation of non-exempt assets.In most cases, these debtors assets were largely exempt from liquidation, making Chapter 7 an easy way for spendthrifts to run up big debts and then walk away from them scot-free.
Chapter 7 changes
Among the laws greatest impacts were its changes to Chapter 7 bankruptcy filings. In the past, debtors could file for Chapter 7 regardless of their income. Under BAPCPA, a means test was instituted to keep middle and upper income individuals from filing bankruptcy under Chapter 7. When an individual files for bankruptcy protection under Chapter 7, the court determines whether his or her income is above the state median income. If it is, the means test comes into play.
Under the means test, the court looks at the individual’s income and bills and determines the individual’s monthly disposable income. When making this judgment, the court takes into account family size, living expenses and some other factors.
For individuals who must submit to the means test, their monthly income is calculated and reduced by a set schedule of deductions set forth by the Internal Revenue Service.
These deductions include:
- Living expenses as defined under the IRS’s collection standards.
- Actual living expenses not covered by IRS standards, including health insurance, health savings account expenses and disability insurance.
- Expenses for protection from domestic or family violence.
- Expenses for nondependent family members care
- The expenses of administering a Chapter 13 repayment plan
- School expenses, up to $1,500 per year for minor children
- Home energy costs
- 1/60 of all secured debt that would come due within five years after the filing of a bankruptcy case
- Charitable donations
- 1/60th of priority debt
In general, if the individual is found to have a monthly disposable income of more than $183.50 after expenses, he or she is ineligible for Chapter 7 bankruptcy. If the individual doesn’t qualify for Chapter 7 bankruptcy, he or she must file for Chapter 13 protection. Under Chapter 13, the individual is placed in a repayment.
Waiting periods
Another change resulting from BAPCPA was an extended time period between bankruptcy filings. In the past, debtors had to wait six years between Chapter 7 bankruptcies. Now they must wait eight years.
Tougher homestead exemption requirements
Prior to the passage of BAPCPA, the amount of a debtor’s home equity protected from liquidation to settle debts was determined by state law. For instance, in Florida, your home is completely exempt from liquidation, while in other states only a part of its value is. Under the new law, if you haven’t lived in a state for more than two years, you’re only able to claim the home exemption available in the state where you previously resided. Also, if you bought your house less than 40 months ago, or if you’ve been found guilty of certain criminal acts, you can only exempt up to $125,000 of your home’s value, no matter what your state’s homestead exemption is.
Credit card debt
Under the new law, the courts take a closer look at individual’s credit card debt and are more likely to toss cases out on a presumption of fraud. The new law expands the court’s ability to presume fraud. BAPCA reduces the amount of money a debtor must spend for “luxury goods” before the presumption of fraud is invoked. The old limit was $1,225. The new limit is $500. Also the amount of money charged in cash advances to trigger a presumption of fraud has dropped from $1,225 to $750. Also, if a debtor charges any item worth more than $500 within 90 days of filing bankruptcy, the presumption that the debtor charged the debt with no intention of paying it will arise.
Retirement plans and consumer benefits
One positive benefit the law conferred upon individuals was increased protection for retirement plans. BAPCPA expanded the number of retirement plans exempt from liquidation in a bankruptcy.
Another provision of the new law that’s beneficial to consumers is its credit counseling requirement. Now debtors hoping to file Chapter 7 or 13 bankruptcy must undergo credit counseling at their own expense within 180 prior to filing. The credit counseling requirement helps debtors determine whether bankruptcy is right for them, and coaches them on better money habits they can follow after their bankruptcy proceedings.
Unintended consequences
Under the new law, attorneys are held liable for any false information they may file on behalf of their clients. This has led attorneys to be more diligent in verifying clients’ information, and has also led to an increase in attorney’s fees for bankruptcy filings.