Introduction
The U.S. Bankruptcy Code was modified by the passage of a new bankruptcy law on April 20, 2005. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is the name of the statute. It was passed by the 109th Congress and signed by President George W. Bush. It is also known as ""the New Bankruptcy Law."" While the Bankruptcy Abuse Prevention and Consumer Protection Act covers both business and consumer bankruptcy, this article focuses specifically on consumer bankruptcy.
Numerous individuals filed for Chapter 7 bankruptcy in order to avoid paying their creditors. Chapter 7, also known as ""liquidation bankruptcy,"" is favored because debts are completely absolved and discharged in this category. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was therefore devised to prevent such misuse of the bankruptcy process. This is accomplished by modifying numerous Chapter 7 filing requirements.
As filing under Chapter 7 becomes more difficult, individuals are compelled to file instead under Chapter 13, also known as ""repayment plan bankruptcy."" Under Chapter 13, debtors are permitted to repay creditors over a specified time period. Chapter 13 debts must be repaid, despite the fact that courts frequently reduce payments to make them more affordable. Thus, the underlying goals of the Act are to prevent system exploitation and encourage more individuals to repay their debts.
BAPCPA modifies Chapter 7 and Chapter 13 Bankruptcy as follows:
Eligibility for Chapter 7: """"Abuse"""" of the Procedure
Prior to the passage of BAPCPA, anyone with any income could petition for Chapter 7 bankruptcy. Now, BAPCPA restricts the number of Chapter 7 filers. It accomplishes this by permitting courts to invalidate a claim if: the debt is predominantly consumer debt (such as credit card debt) and relief would be an abuse of the Chapter 7 process. Finding instances of """"abuse"""" is a primary objective of the Act. The court may determine maltreatment in two ways:
• """"Exhibition of bad faith"""": The court will find abuse if the individual or married couple filed their Chapter 7 paperwork in bad faith. The court determines this based on """"a compendium of the circumstances"""", analyzing factors such as the existence of fraud, etc.
• """"Presumption of Abusive Conduct""""- Alternatively, if no evidence of ill faith is presented, the court may presume that a person has abused the process. It accomplishes this by implementing the ""means test,"" which determines eligibility based on monthly income. This is the more prevalent method.
This law makes it simpler for courts to determine whether or not abuse has occurred. Before BAPCPA, the Bankruptcy Code required courts to demonstrate """"substantial abuse"""" prior to denying a claim. In its place, the BAPCPA permits courts to presume abuse. The following """"means test"""" is utilized by bankruptcy courts to determine presumptive abuse.
Activating the ""Means test""
As stated previously, prior to the Bankruptcy Abuse Prevention and Consumer Protection Act, anyone of any income level could file for Chapter 7 bankruptcy. The court will employ the means test to determine if there is a presumption of abuse if the individual's monthly income is greater than the state median income. Consider the monthly income as a """"trigger"""" for the means test; the test will only be triggered if the income is greater than the state median. Also remember that the means test is irrelevant if the debt is not primarily consumer debt.
How the """"Means Test"""" Operates
The precise calculations and computations required by the means test are intricate. It requires numerous modifications; for instance, figures can alter based on family size. In general, it operates as follows:
The court will determine the individual's or couple's """"current monthly income"""" using various timetables and comparisons to state medians. After determining current monthly income, the amount is reduced by the value of certain itemized deductions specified by the IRS (also referred to as """"presumed expenses""""). A detailed inventory of allowable deductions can be found in the statute itself.
After deducting the deductions from the current monthly income, abuse is presumed if:
1) The individual's current monthly income after deductions, totaled over the past five years, exceeds $10,000.
OR
2) The individual's present monthly income after deductions, when added over a period of five years, equals 25% of the debt owed (this total must be at least $6,000).
The logic behind the means test is that if your income exceeds a certain threshold, you do not have to file for liquidation bankruptcy. This is particularly true for #2 above. If you can repay at least 25 percent of your debts, you should file for Chapter 13 repayment bankruptcy instead of Chapter 7 liquidation bankruptcy.
If either a finding of poor faith or a presumption of abuse is made by the court, the Chapter 7 application will be denied. Then, they will determine whether to enable the individual to file under Chapter 13.
Clearly, this can become complicated. As stated, this is a general overview; if you are filing under Chapter 7 and believe you may be subject to the means test, consult an attorney.
Refuting the Abuse Presumption
A person may rebut the presumption of abuse in specific instances. They may only do so if """"special circumstances"""" exist, such as a severe medical condition or a call to active duty in the military.
Also, keep in mind that only individuals whose monthly income exceeds the state median will be considered for the means test. For individuals with incomes below the state median, courts are not permitted to even commence the process of presuming abuse. This effectively establishes a safe harbor for those with low income, though they may still be penalized in other situations, such as bad faith.
Other Repercussions of the BAPCPA
The Bankruptcy Abuse Prevention and Consumer Protection Act has affected bankruptcy law in numerous and extensive ways. Popularly discussed implications of the law include the following:
• Waiting Period between Filings: The Bankruptcy Abuse Prevention and Consumer Protection Act extends the time between Chapter 7 filings. Under BAPCPA, the interval between filings has increased from six to eight years. In some instances, the law has also imposed new waiting periods between the filings of Chapter 13 cases.
• Mandatory Credit Counseling: Under the Bankruptcy Abuse Prevention and Consumer Protection Act, applicants must now obtain credit counseling before filing for Chapter 7 bankruptcy. This must be completed 180 days prior to filing, and counseling must be provided by an approved agency. This requirement did not exist prior to the passage of the act.
• Automatic Stay: The automatic stay is a court procedure that instructs creditors to cease collecting from debtors pending the conclusion of the proceedings. The BAPCPA restricts this procedure based on the number of times a case is lodged.
• Non-dischargeable debts: The new law also makes additional types of debt """"non-dischargeable"""" (i.e., the debt cannot be absolved and must be repaid). Non-dischargeable obligations include student loans and money borrowed from private lenders. Thus, a greater number of debt classifications are transferred from Chapter 7 to Chapter 13 status.
• Chapter 13 Bankruptcy: The Bankruptcy Abuse Prevention and Consumer Protection Act also modifies how courts calculate total repayment debt using disposable income and other figures. Historically, judges had considerable latitude in determining their calculations. Under the Act, judges must now adhere to more stringent IRS regulations.
Conclusion
Evidently, the Bankruptcy Abuse Prevention and Consumer Protection Act has made Chapter 7 bankruptcy requirements more stringent and demanding. The Act has received a great deal of criticism from various economic sectors. According to many, the new law makes the bankruptcy process more difficult.
Some believe that the new requirements, such as mandatory credit counseling and lengthier waiting periods, ultimately cause them to spend more money. Those in favor of the Act argue that individuals should repay their loans instead of clogging the system with frivolous claims. Again, if you believe you have a bankruptcy claim or need advice on these matters, you should consult a counsel who will assist you with the particulars of your case.""
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