- 7 min read
- Under the 2005 rules, more consumers will file Chapter 13 bankruptcy.
- Consumers must provide more information to the trustee under the 2005 rules.
Information About the Bankruptcy Abuse Prevention and Consumer Protection Act 2005
In 2005, Congress approved and then enacted a new Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), designed to lower the number of bankruptcy filings and to prevent abuse of the bankruptcy system. 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 illuminate the key differences that went into place with the bankruptcy reform law in 2005, and how this information may impact you.
The new bankruptcy law, enacted by Congress in 2005, requires that you complete a counseling session with a US 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 (DMP) 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.
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 or to seek temporary protection from creditors through filing a Chapter 13 bankruptcy and then modifying it into a Chapter 7 later.
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 US 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, is another new provision of the bankruptcy code added by the BAPCPA in 2005. Basically, it is designed to determine whether you have enough disposable income each month to make reasonable payments to your creditors. If you do, you will be guided into a Chapter 13 repayment plan and unable to discharge your debts in a Chapter 7.
To find out whether 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, non-priority 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 prevent abuse of the bankruptcy system by forcing wage earners with what the court defines as substantial income to repay their debts.
Due to all of the new requirements under the new bankruptcy law, attorneys are required to spend much more time on each case, therefore making the cost for the consumer increase dramatically. Where the spiral will slacken is estimated to be $250 per hour times 30 hours. In addition, attorneys must now personally verify and vouch for all financial information provided by their clients. This means the attorneys must spend even more time on cases, and at personal liability and risk if the information is incorrect. This translates into fees, as bankruptcy attorneys are not willing to take such a risk without being properly compensated by their clients.
Many attorneys ceased taking new bankruptcy cases when the law came into effect.
Under the old rules, Chapter 13 bankruptcy filers were required to pay all disposable income into their repayment plan, meaning that any money left from their income after paying actual expenses went to pay their creditors. However, the new system changes the definition of disposable income. As discussed earlier, disposable income is no longer based on the filer’s actual expenses; rather, it is based on the IRS "allowable expenses" chart. The IRS allowances are much lower than actual costs, in many cases. Also, remember that the "allowable expenses" are not subtracted from the debtor’s actual income at the time of the filing, but rather the average income for the preceding six months. Therefore, filers could end up being required to pay more into their Chapter 13 plan than they actually earn in a given month!
This means that more consumers are forced into Chapter 13 than Chapter 7, and in the new rules many consumers will now be forced to repay more under the new Chapter 13 rules than in years past.
Under the old system, the property of Chapter 7 filers was valued at what property could bring at auction. Therefore, items such as furniture, heirlooms, cars, and other personal property were assigned little value. This meant that property fell within the property exemptions allowed by most states, meaning the property could not be taken to repay creditors.
However, under the new law, the filer’s property is valued at the cost of replacement at retail, taking into consideration age and condition. This new rule greatly increases the purported value of the property, making it much more difficult for debtors to exempt their property from the trustee taking it to repay creditors — which means more furniture and other assets could be seized and sold under the new system.
Under the old system, filers were able to use the personal property exemptions of the state where they lived, as long as they had lived there for at least three months. Now, filers must live in their new state for two full years before they can use the state’s personal property exemptions. In order to use the homestead exemption of their new state, filers must have lived in the state for 40 months. This new law was designed to thwart bankruptcy filers’ moving to a state with more favorable exemption laws in order to file bankruptcy using that state’s exemptions.
The 2005 law made it harder than before to file for Chapter 7 bankruptcy protection, and the alternative solution of a Chapter 13 bankruptcy is more costly than before 2005.
VIDEO: Bankruptcy - What is Bankruptcy?
Dealing with debt
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q2 2023 was $17.06 trillion. Auto loan debt was $1.582 trillion and credit card was $1.031 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
The amount of debt and debt in collections vary by state. For example, in Montana, 20% have any kind of debt in collections and the median debt in collections is $1589. Medical debt is common and 11% have that in collections. The median medical debt in collections is $702.
Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.