On October 17th of 2005, a new bankruptcy law entitled the “Bankruptcy Abuse Prevention and Consumer Protection Act ”(or “BAPCA”) went into effect on a national scale. The law was created and passed by President George W. Bush and our 109th Congress. Critics argue that the new bankruptcy laws are a result of Congress giving in to the demands of wealthy creditors who have aggressively lobbied for bankruptcy law changes for many years.
The new bankruptcy laws affect all bankruptcies filed, but recent studies show that approximately 80% of past filers who would qualify previously under the old laws would still qualify to file under the new bankruptcy laws. They would be eligible to eliminate substantially the same debts as before.
The changes that BACPA made to the previous Bankruptcy Code are all encompassing. The new law greatly impacted how bankruptcy law is practiced and what procedures must be followed.
Determining Eligibility to File Chapter 7
The new bankruptcy law set forth a new eligibility test called the “Means Test.” Instead of looking at your actual budget to see if you can afford to repay your debts, the Bankruptcy Court now looks at an average budget and income in the state and county you live in to see if you should be able to afford to repay your debts.
Using this average budget instead of your real budget means some people who would have qualified for a Chapter 7 bankruptcy under the old laws won’t necessarily qualify under the new law. A Chapter 13 bankruptcy may still be available even if you don’t pass the means test. However, for most people, the law change won’t affect their ability to file a Chapter 7 bankruptcy and may even make eligibility easier to demonstrate.
If your household makes less than your state’s median income for a family of your size, you are “presumed” not be abusing the Bankruptcy Code and you can file Chapter 7 rather painlessly. The new law’s budget criterion (or the Means Test) also takes into account the inflated cost of living in high-cost living areas that you find in many major cities and metropolitan areas across our country. The Means Test gives you a reasonable allowance for paying rent, utilities, food, clothing and transportation based on where you live and how large your household is. The more expensive the area you live in, the higher your allotted allowances is. So for people living in high-cost of living areas, this means that the new law doesn’t necessarily restrict eligibility for Chapter 7 — it makes it easier.
Under the new law, you are automatically eligible to wipe out your debts with a Chapter 7 bankruptcy if you are below the average median income for your family size in the state that you live in.How Does the New Bankruptcy Law’s “Means Test” Work?
Under the new law, you are automatically eligible to wipe out your debts with a Chapter 7 bankruptcy if you are below the average median income for your family size in the state that you live in.
Your income is based on your household size and is calculated on the last 6 months prior to the filing date of your case.
If your total household income is below your state’s median income for a household of your same size, you pass the Means Test and you have automatic eligibility to wipe out your debts with a Chapter 7 bankruptcy.
If your income is over your state’s median income of by a little, it is still relatively easy to get approved for a Chapter 7 bankruptcy. If your income is significantly over your state’s median income, it may mean you may need to file a Chapter 13 Repayment Plan, unless you can show an unusual factor, like an on-going medical situation or a high court-ordered support payment.
In determining whether the median threshold has been reached, the law looks at the number of people in the filing person’s household. The census bureau defines “household” to mean “all the people occupying a dwelling unit.”
The trustee or any of your creditors can bring a motion to dismiss your case if your income is greater than your state’s median income. “Abuse” is presumed if your current monthly income — except for any secured payments (like a house or car) divided by 60, any priority debts (like tax repayment or child support) divided by 60, any allowed expenses permitted by the IRS, and certain other allowed expenses — is greater than $100 per month.
If the amount leftover in your monthly budget is higher than $100 and meets this new standard, your only option under the new Bankruptcy Law may be a 5-year repayment plan in a Chapter 13 bankruptcy.
If your income falls below the state median, the Bankruptcy court may still find abuse but the creditors do not have the standing to file the motion.
The presumption of abuse may only be rebutted by you or your attorney if you can demonstrate “special circumstances that justify additional expenses or adjustments of current monthly income.”
Was the New Bankruptcy Law a Positive Change?
Many experts in the Bankruptcy field don’t think so. The new law was vehemently opposed by everyone from Bankruptcy Judges and trustees to credit counseling agencies and law-school professors.
The new law leaves no way for a small percentage of people who really need a fresh-start to obtain one via a Chapter 7 bankruptcy.
Some of the more unpopular changes include the creation of more types of non-dischargeable debts.
These include any debts that were ordered to be paid in a divorce or separation agreement; and any debts incurred at a “for-profit” educational institution (most trade schools fit this description). The new law is also much tougher on people who owe old income taxes.
Due Diligence Requirements
The new law put in place additional document and credit counseling requirements that everyone who files a Chapter 7 or 13 must now satisfy to be able to receive a successful discharge of their debts.
Please keep in mind that these requirements vary on where you live and who your Bankruptcy trustee is.
The new bankruptcy law requires you to produce your last 6 months of pay stubs and any other proof of income, and your last 4 years of tax returns for your trustee to review.
In a Chapter 13 bankruptcy, all four previous tax returns must be produced for the trustee, which means if you haven’t filed taxes for those years, you need to do so or your case may be dismissed after filing.
In a Chapter 7 bankruptcy, you are only required to produce any of the last four years of tax returns that you have filed. So, if you haven’t filed for all previous four years preceding your Chapter 7 filing, you may not be required to file those tax returns.
Credit Counseling Requirements
In addition to the new document requirements, you need to pay for and complete two counseling sessions.
The pre-filing credit course must be completed before you file a bankruptcy and is often referred to as the Credit Counseling briefing.
The second class is done after the filing of your bankruptcy, but before discharge, and is often referred to as the Debtor Education or Financial Management briefing.
Credit Counseling Briefing
Within 180 days before filing bankruptcy, you must receive a credit counseling briefing from an approved nonprofit budget and credit counseling agency.
This counseling briefing is a question and answer session with an approved non-profit credit counselor who tries to help you see if there is a way you could repay your debt and avoid bankruptcy.
The briefing usually takes around 45-90 minutes and can be done via telephone or online. If the course is not completed within the 180 days prior to filing your bankruptcy, your case is dismissed.
Debtor Education/Financial Management Briefing
To be able to receive a Chapter 7 Discharge, you must complete your post-petition financial management course within 60 days after your 341 Meeting. For Chapter 13 Discharges, you must complete your post-petition financial management course before the completion of your case. This course is of an instructional nature and is tailored around managing your personal finances after bankruptcy. The class takes approximately two hours and can be done over the telephone or online. If the briefing is not completed within the allotted time period, you may not receive a discharge.
The 21 Biggest Changes to the Bankruptcy Law
- Means Test for Chapter 7 Eligibility
The Means Test is based off of your state’s Median Income. If you and the other members of your household make less a year than your state’s median income for your household size, you qualify to file Chapter 7 bankruptcy without having to pass the Means Test. If your household earns over your State’s Median Income for your household size, you must take and pass the Means Test to qualify to file Chapter 7 bankruptcy. If your household income is too high and you don’t pass the Means Test, you may be eligible to file a Chapter 13 bankruptcyTo determine what your income is for the Means Test, you must calculate your average gross income over the past 6 months prior to the filing of your case. This calculated income is often very different than what your present actual income is at the time you file your Chapter 7. Fixed costs like taxes, mortgage and car payments, health insurance, support payments and child care are subtracted from your gross income. Necessities like rent, utilities and transportation costs are set forth in your county’s IRS’s Collection Standards as fixed amounts and are deducted from your gross income as well. The amount that’s left over after those allowable expenses is your disposable incomeIf your household is over your state’s median income, that monthly disposable income amount is then multiplied by sixty (60) to determine how much total disposable income you’ll have over the next five years.
“Abuse” is presumed if your current monthly income — minus any secured payments (like a house or car) divided by 60, any priority debts (like tax repayment or child support) divided by 60, allowed expenses permitted by the IRS, and certain other allowed expenses — is greater than $100 per month. If the amount leftover in your monthly budget is higher than $100 and meets this new standard, your only option under the new Bankruptcy Law may be a 5-year repayment plan in a Chapter 13.
- Mandatory Credit Counseling
Within 180 days before filing bankruptcy, you must receive a credit counseling briefing from an approved nonprofit budget and credit counseling agency. This counseling briefing is a question and answer session with an approved non-profit credit counselor who tries to help you see if there is a way you could repay your debt and avoid bankruptcy. The briefing usually takes around 45-90 minutes and can be done via telephone or online. If the course is not completed within the 180 days prior to filing your bankruptcy, your case is dismissed.
- Mandatory Debtor Education
To be able to receive a Chapter 7 Discharge, you must complete your post-petition financial management course within 60 days after your 341 Meeting. To be able to receive a Chapter 13 Discharge, you must complete your post-petition financial management course before the completion of your case. This course is of an instructional nature and is tailored around managing your personal finances after bankruptcy. The class takes approximately two hours and can be done over the telephone or online. If the briefing is not completed within the allotted time period, you may not receive a discharge.
- Time between Chapter 7 Discharges
You cannot receive a Chapter 7 discharge if you received a prior Chapter 7 discharge within 8 years (rather than the 6 years under the former law) of the new filing.
- Serial Filings (Chapter 20)
If you’ve received a Chapter 7 bankruptcy discharge within 4 years of your Chapter 13 filing, you are not eligible for a discharge under Chapter 13. You may still file a Chapter 13 bankruptcy within this 4-year period if you’d like to repay your debt under the supervision of the Bankruptcy Court or want to save your house from foreclosure, but you do not receive an official discharge of your debt.
If you’ve received a Chapter 13 discharge within 2 years of a second Chapter 13 filing, you are not eligible for a discharge under the second Chapter 13. You may also file a Chapter 13 within this 2-year period if you’d like to repay your debt under the supervision of the Bankruptcy Court or want to save your house from foreclosure, but you do not receive an official discharge of your debt.
- Residency Requirement
You may claim your state’s bankruptcy exemptions if you have lived in that state for a 2-year period (730 days) prior to the filing of your bankruptcy. If you lived in multiple states during that 2-year period, you must use whatever state’s exemptions you resided in 6 months (180 days) before the 2-year period. In other words, where you lived 2.5 years before your Bankruptcy was filed.
- Homestead Exemption
No matter the amount of your state’s homestead exemptions, you may only exempt up to $125,000 of equity in your homestead if you acquired it within a 1,215-day period (approximately 40 months) prior to the filing of your bankruptcy.
New disclosures are now required detailing your rights to reaffirm your secured debt. These disclosures must specify the amount of debt to be reaffirmed, interest rates, and when your payments begin. They must also include the language that you have a right to rescind the reaffirmation and must certify that the reaffirmation agreement does not impose an “undue hardship” on you. In other words, it must be shown that you have the ability to make your future reaffirmation payments to the creditor that you wish to reaffirm with. A hearing may be held in some jurisdictions where you or your attorney have an opportunity to prove this to the court.
- Limit on the Automatic Stay in Regards to Serial Filings
The new law limits the application of the automatic stay that goes into effect when your case is filed. With regard to serial filings (multiple filings in a fixed period of time), the new law provides that the automatic stay does not go into effect in those circumstances where the most current filing would indicate bad-faith or abuse. In a situation where you have filed a Chapter 7 or 13 bankruptcy within 1 year after the dismissal of a prior case under either Chapter, the automatic stay terminates after 30 days. However, you and your bankruptcy attorney may file a motion to extend the automatic stay if you can show that your latest bankruptcy petition was filed in good-faith.
- Dismissal for Failure to Provide Additional Documents
In addition to all the required schedules and document of the bankruptcy petition, you must also provide:
a. a certificate of credit counseling
b. 60 days of paystubs from immediately prior to the filing of your case
c. statement of monthly net income and any anticipated increase in income of expenses after filing
d. tax returns or transcripts for the most recent tax year (possibly the most recent four years)
e. a photo IDYour failure to provide the above required documents within 45 days after the petition has been filed (with a possibility of a 45-day extension) results in the automatic dismissal of your case after the time period has passed.
- Statement of Intention in Chapter 7s
Within 30 days after the filing of your Chapter 7 petition, you must file your Statement of Intention. This document is also part of the Chapter 7 petition and indicates whether you are surrendering or reaffirming any debt that is secured by collateral, such as a car or a house. If you plan to keep your secured property, the Statement of Intention needs to indicate whether you intend to: (1) reaffirm the debt and continue to make the payments under the same terms of the original agreement, or (2) redeem the property by paying the fair market value of the secured property to the original creditor. Any difference owed to the original creditor above and beyond the fair market value of the property is discharged in your Chapter 7, or (3) surrender the property back to the creditor and eliminate the resulting debt.
- Duration of Chapter 13 Plans
If your household income is greater than the state’s median income, your proposed Chapter 13 Repayment Plan must be for 5 years. In addition, your attorney must file a new statement of income and expenses for those five years on the same date of the year that the case was originally filed.
- Domestic Support Obligations in a Chapter 13 Bankruptcy
If you fail to remain current on your support payments after the filing of your Chapter 13 bankruptcy, your case may be dismissed. You must also be current on any post-petition support payments for your Chapter 13 Repayment Plan to be confirmed by your Bankruptcy Judge. You also do not receive a discharge in your Chapter 13 bankruptcy unless all your support payments are paid in accordance with the terms of your Chapter 13 Repayment Plan.
- Limit on Auto Lien-stripping in Chapter 13
If you have a creditor that holds a security interest in a car you purchased from them within 2.5 years (910 days) of the filing, your Chapter 13 plan must provide that your creditor retain its lien on the car until the entire debt is paid off. This eliminates the ability to “cram-down” payments on cars bought within the previous 2.5 years of filing.
- “Superdischarge” in Chapter 13 Reduced
Any tax debt in which you never filed returns, filed them late or made a fraudulent return; debts not listed on the bankruptcy petition; domestic-support payments; student loans; drunk-driving injuries; criminal restitution; and fines and civil restitutions rewarded for willful or malicious personal actions causing personal injury or death can no longer be discharged in a Chapter 13 bankruptcy.
- Tax Returns Mandatory in Chapter 13s
In a Chapter 13 bankruptcy, all four previous tax returns must be produced for the trustee, which means if you haven’t filed taxes for those years, you need to do so or your case may be dismissed after filing. In Chapter 7 bankruptcies you are only required to produce any of the last 4 years of tax returns that you have filed. So, if you haven’t filed for all previous 4 years preceding your Chapter 7 filing, you may not be required to file those tax returns.
- Luxury Goods and Cash Advances
Debts owed to a single creditor totaling more than $500 for luxury goods incurred within 90 days of filing are presumed non-dischargeable. Credit card cash advances of $750 within 70 days are also presumed non-dischargeable.
- Student Loans
Student loan non-dischargeability was expanded by the new law to include to “for-profit” educational institutions and non-governmental entities. This includes most trade schools. Therefore, if the debt was incurred for an educational purpose, it is probably not dischargeable in a bankruptcy filing.
- Attorney Verification Required
Your Bankruptcy attorney must make a “reasonable inquiry to verify that the information contained” in your bankruptcy petition and schedules are “well grounded in fact.” This requirement places an additional burden on your attorney to research your asset and liabilities prior to the filing of your case.
- Attorneys as “Debt Relief Agencies”
Bankruptcy attorneys must use the following language in any advertising: “We help people file for relief under the Bankruptcy Code.”
- Notice to Creditors
All notices of the filing of your bankruptcy to creditors must include account numbers. The notice must be to the registered address designated by your creditor. This address can usually be found in communications from the creditor like monthly statements, or by the creditor’s preferred address as provided to the bankruptcy court.