Understanding the Bankruptcy Abuse Prevention and Consumer Protection Act

Bankruptcy is a powerful tool used that can be used to protect you and your family from debt collection when you are unable to pay debt. Bankruptcy is, in fact, one of the few legal protections that the common man (or woman!) has against the combined might of the banking and loan industry.

When it comes time to declare bankruptcy, however, it is important that you understand all of your rights as well as your obligations. In recent years, the nature of bankruptcy has been changed, especially through the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005 (the “BAPCPA”).

The BAPCPA was a bill largely sponsored by the banking and loan industry, and it attempts to make it more difficult for you to file a Chapter 7 bankruptcy, instead encouraging you to file a Chapter 13 bankruptcy instead. From the banking industry’s perspective, this is preferable, and the bill was seen as a big victory for them. Understanding how the BAPCPA has changed bankruptcy law is important if you’re to successfully go through a bankruptcy of your own.

Money, Money, Money

Before the BAPCPA was passed, you could file for bankruptcy under Chapter 7 regardless of your income level; rich or poor, middle class or wealthy, Chapter 7 was a safety net for you. Prior to the BAPCPA, one could still get their bankruptcy denied if they had excessive disposable income and were deemed to be abusing the system. The BAPCPA, however, inserted a means test requirement into the bankruptcy laws, which checks to see if your income is above the median income of your state. If it is, then your ability to pay some debts in a Chapter 13 bankruptcy is calculated by looking at your current monthly income and reducing it by certain deductions, or “presumed expenses,” as outlined by the IRS.

If, after the means test has been applied, you have at least $182.50 in monthly income, or you have at least $109.59 in monthly income and this would be enough to pay your unsecured creditors 25% over five years, then your Chapter 7 bankruptcy filing is presumed to be abusive, which means that instead of filing a Chapter 7 bankruptcy, you may have to file a Chapter 13 bankruptcy. You can rebut – or, essentially, appeal – the presumption of abuse by providing documentation of special circumstances that justify a chapter 7 discharge. If you can’t rebut the presumption of abuse in your case, you can either dismiss your Chapter 7 case, or convert it to a Chapter 13 case.

Learning is Fundamental

Less technical changes were made to bankruptcy law as well. For example, there is the lengthening of the time between bankruptcy filings. You can now be denied a discharge if you received a discharge in another Chapter 7 case filed in the last eight years; before BAPCPA, you had to wait six years instead. However, the waiting period for Chapter 13 filings remains unchanged – yet another nudge towards filing for Chapter 13 bankruptcy.

Another instance of banks protecting themselves against abusive debtors through BAPCPA is the obligatory credit counseling and debtor education that some debtors are required to go through. You will not be eligible to file under either Chapter 7 or Chapter 13 unless, within 180 days before filing, you receive an individual or group briefing from a nonprofit budget and credit counseling agency. That agency has to be approved by the U.S. trustee or bankruptcy administer, as well. Additionally, you must complete an instructional course on personal financial management. A Chapter 7 debtor who fails to fulfill these requirements can actually have their case dismissed!

Weighing Your Options

The BAPCPA included a number of other changes, including stricter notice requirements, protections to creditors through the expansion of exceptions to discharge, limitations on lien avoidance and the homestead exemption, and many other changes. The take-away for you is that it is more difficult to file for Chapter 7 bankruptcy than it has been in the past; however, with the help of a good lawyer, you can navigate this complex web of laws and successfully declare bankruptcy. To not do so holds far worse consequences than declaring bankruptcy ever could; sometimes, it is necessary to weather the obstacles put up by others, and do the right thing for you. Bankruptcy is one of those times.