In Bankruptcy -- Debt -- Bankruptcy Means Test

New Law Causes Drop In Bankruptcy Cases

The Bankruptcy Abuse Prevention and Consumer Protection Act 2005 (BAPCPA) has caused a big drop in bankruptcy filings, because it has made it much more difficult for people become debt-free by filing for bankruptcy. While bankruptcy law was very much in favor of debtors in the past, it has become much more favorable for creditors now. 

Banks and other financial services companies had been complain for years that bankruptcy laws had been abused by gamblers, compulsive shoppers, and others, who were in the habit of living beyond their means. These changes in the laws relating to bankruptcy cases were passed to address the concerns of lenders. 

BAPCPA was passed by Congress and was signed by President Bush on April 20, 2005. The Act made sweeping changes to the Bankruptcy Code, which affects almost all aspects of bankruptcy cases relating to individuals as well as businesses. 

Many people oppose BAPCPA and feel that it is a sell out to the credit card industry, which lobbied very hard to get it passed. It will take away the protection that was available to those who are suffering from severe financial problems due to serious ailments and job losses. It will have the biggest impact on the poor, the elderly, minorities, and single mothers. 

The credit card companies lobbied for BAPCPA on the grounds that many people who file for bankruptcy are opportunists, who file for bankruptcy even when they have the ability to pay, and use loopholes in the law to shelter their wealth. On the other hand, non-opportunists file for bankruptcy only when the actually face financial setbacks, that limit their ability to repay their debts. 

As per the provisions of BAPCPA debtors can no longer choose to file a Chapter 7 bankruptcy or Chapter 13 bankruptcy petition. Debtors must pass a bankruptcy means test to file under Chapter 7, which involves paying off debts through liquidation of assets. The means test requires that their incomes must be less than a minimum cut-off level based on the median family income in their state. 

Commercial enterprises file Chapter 11 bankruptcy plans to continue their operations, while they pay off their debts through a re-organization plan that has been approved by the bankruptcy court. 

If the debtor’s income is more than the cut-off level then he or she must file for bankruptcy under Chapter 13, which involves repaying debts from a regular income, as per a court-approved plan. Home owners who are facing foreclosure often opt to file for mortgage bankruptcy under Chapter 13, to keep their homes. 

BAPCPA increased the cost of filing for bankruptcy from less than $1,000 to about $2,500. The Act increased the minimum period that must elapse between filings, and reduced the amount of debt that is discharged in bankruptcy cases. It also made it mandatory for all debtors to undergo credit counseling and a debt management course.