Bankruptcy Reform

Part 1 of CHANGES TO CONSUMER BANKRUPTCY UNDER THE 2005 BAPCPA REFORM

In 2005, Congress approved and then enacted a new Bankruptcy Reform Act, designed to lower the number of Bankruptcy filings. The net result is that it is harder and more time consuming to file bankruptcy, and many consumers cannot even qualify to get their debts discharged in a Chapter 7 bankruptcy proceeding. Below, we'll try to illuminate the key differences that went into place with the new Bankruptcy Reform law.

Counseling Requirements
The new bankruptcy law, enacted by Congress in 2005, requires that you complete a counseling session with a U.S. Trustee approved Credit Counseling firm before you can file for either Chapter 7 or Chapter 13 Bankruptcy. While you are not required to actually enroll in a Debt Management Plan with the Credit Counseling agency to repay your debts, if they come up with a repayment plan, it must be submitted to the court, along with a certificate that you have completed financial counseling, before your case can proceed. You will also be required to complete a pre-discharge counseling session at the end of your bankruptcy case to review fundamentals of financial management. Only after you complete this second counseling session can you receive a discharge of your debts.

Basically, the Bankruptcy Reform Act wants consumers to educate themselves and ideally find a repayment method outside of the Bankruptcy system to repay their debts.

Restricted Eligibility for Chapter 7

Income Requirements
The first thing your attorney will do when figuring your eligibility to file bankruptcy is compare your "current monthly income" to the median income for a family of an equal

size in your state. However, your "current monthly income" is not actually your current income at the time you file. Rather, it is the average monthly income for the six months preceding your filing. Many people who file bankruptcy are forced to do so due to a recent job loss or illness, so the requirement to use the last six months' income will likely prevent many people who desperately need relief by filing bankruptcy. This means that many consumers may be forced to repay their creditors, rather than discharge their debts in a Chapter 7 bankruptcy.

Once you have calculated your income, compare it to the median income for your state. A table of median income by state for different family sizes is available from the U.S. Bankruptcy Trustee’s office. If your family’s median income is less than or equal to the median income for your state, you will probably qualify for Chapter 7. If your median income is higher, you must go to the next step, the "means test" to see if you qualify for Chapter 7.

The Means Test
The Means Test, is another new provision of the bankruptcy code added by the BAPCPA in 2005. Basically, it is designed to figure out whether or not you have enough disposable income each month to enter into a Chapter 13 repayment plan.

To find out whether or not you pass the means test, you subtract certain expenses

from your "current monthly income." First, subtract "allowable expenses," as defined by the IRS. You cannot use your actual monthly expenses, only the IRS amounts, which were originally designed to punish tax cheats, and are certainly much lower than your actual real-world expenses. Next, subtract monthly payments you must make to secured creditors, such as your car payment, and "priority" creditors, such as alimony, tax debt, etc.

If, once you have subtracted all of your allowable expenses and required payments, you have less than $100 in "disposable" income each month, you can file Chapter 7. If you have more than $166.66 in disposable income, you cannot file Chapter 7. If you fall between $100 and $166.66, you must figure out whether or not your disposable income is enough to pay more than 25% of your unsecured, nonpriority debts over five years. If it is not enough, you can file Chapter 7. If it is enough to pay 25%, you will not be allowed to file Chapter 7.

Basically, the goal of the median income and the means test is to force wage earners with substantial income to repay their debts.

Continue on to part 2 of bankruptcy law reform.

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