April 20, 2012
Chapter 7 was the route most took since, under it, most debts were forgiven, as opposed to Chapter 13, which is essentially a form of debt consolidation.
This all ended with the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which was signed into law by President George W. Bush on April 20, 2005.
The BAPCPA brought the most sweeping changes to personal finance laws in recent history.
As one could probably surmise by the name, the law’s purported purpose was to prevent abuse of the bankruptcy system.
Preventing “abuse” under the BAPCPA meant making Chapter 7 bankruptcy much more difficult for individuals.
The most noticeable change made to the bankruptcy code to accomplish this was the imposition of a “means test.”
This means test did not apply to debtors with statutorily-defined incomes in the six months preceding the bankruptcy filing date lower than that of the median income of the state in which they reside.
If the debtor’s income is higher than the state’s median income level, however, he or she is subject to the means test.
The means test starts with the debtor’s statutorily-defined income, and then reduces the income level using a set of IRS-specified deductions (11 U.S.C. § 707(b)(2)(A)(ii-iv) lays out those deductions).
Filing for bankruptcy under Chapter 7 is foreclosed if, after the means test is completed, the debtor’s available monthly income is more than $195.42, or 0.416% of the debtor’s total unsecured debt, such as credit cards or medical bills – whichever is less.
In other words, the BAPCPA changed the bankruptcy code to only allow those who were really, really struggling to make ends meet qualify for Chapter 7 bankruptcy.
However, Chapter 13 bankruptcy didn’t go unchanged by the BAPCPA either.
Before the BAPCPA, Chapter 13 debtors had to devote all of their disposable income – what they had left after paying their actual living expenses – to their court-monitored bankruptcy repayment plan.
This is still true after the BAPCPA’s enactment, except that the definition of “disposable income” has changed.
A debtor’s income is calculated based on the filer’s average income during the six months before filing, not the filer’s actual income.
In addition, the debtor’s disposable income is no longer calculated through deducting the filer’s actual living expenses, but by deducting allowed expense amounts prescribed by the IRS.
Thus, the BAPCPA’s definition of “disposable income” could easily exceed the debtor’s actual disposable income, making the bankruptcy plans under Chapter 13 potentially far more demanding for debtors.
Being that the law was quite lengthy, though, it affected more than just these few changes.
Perhaps the single most important of these many changes to attorneys is found at 11 U.S.C. § 707(b)(4).
That section requires the debtor’s attorney to personally attest that he or she has:
- “performed a reasonable investigation into the circumstances that gave rise to the petition, pleading, or written motion;” and
- “determined that the petition, pleading, or written motion is well-grounded in fact” and keeps with existing law (or makes a good faith argument for a change in existing law).
Violations of this section could (i.e. will probably) result in the assessment of an “appropriate civil penalty.”
Furthermore, if a debtor fails the Chapter 7 means test and the action is either dismissed or converted to a Chapter 13 action, the attorney has to reimburse the bankruptcy trustee his/her/its costs in bringing the motion to dismiss or convert.
With this kind of personal liability, it’s no surprise that fewer attorneys would choose to take bankruptcy cases, and that many still practicing in the area charge higher fees to cover the increased costs associated with increased liability.
Whether all of these changes actually reduced consumer bankruptcy abuse remains to be seen.
Unless, of course, one uses the BAPCPA’s definition of “abuse” – found every time a debtor fails the Chapter 7 means test.
Under those circumstances, the BAPCPA has been wildly successful at stopping bankruptcy “abuse.”