Throughout the years between 1997 to 2005, the rate of personal bankruptcy filings (i.e., Chapter 7 and Chapter 13) was steadily on the rise. Given the prosperous state of the economy at the time, lawmakers became increasingly concerned with the alarming amount of individuals filing for bankruptcy. The theory that consumers were abusing the system quickly became widespread and soon Congress started adopting numerous pieces of legislation to combat the issue.

Finally, in April of 2005, Congress signed the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) into law. This new bankruptcy law led to many changes in the federal U.S. Bankruptcy Code, affecting both consumers and businesses alike. However, the most prominent of these changes was the effect it had on the requirements for consumer bankruptcy.

Specifically, the BAPCPA created three major bankruptcy amendments that made it even more difficult for consumers to file for bankruptcy. The amendments were highly contentious because of the negative impact they had on consumers and their ability to seek relief from debt. The most controversial of the three new conditions imposed by BAPCPA was the requirement of the “means test”, which will be discussed in further detail below.

The other two changes include a mandatory pre-bankruptcy credit counseling course that debtors will need to complete before filing for bankruptcy and compliance with certain restrictions that were placed on the automatic stay guidelines for bankruptcy.

In addition, the BAPCPA resulted in several lesser yet still significant changes, including:

  • How often a debtor may file for bankruptcy;
  • New rules regarding liens on motor vehicles;
  • Which forms of debt, loans, and/or family support are not dischargeable and which types take priority over the others; and
  • State and federal property exemptions, with the most notable one being the homestead exemption.

Although it may seem as if this law created more problems for consumers rather than protections, BAPCPA does afford one essential protective measure, which is the automatic stay against creditors.

An automatic stay is a type of injunction issued by a federal bankruptcy court that prevents creditors from going after debtors (e.g., collecting, harassing, suing, etc.) for overdue payments. However, there are some exceptions to which the injunction may not apply.

Thus, in order to reap the benefits of the automatic stay, you may want to contact a local bankruptcy lawyer if you are planning on filing for consumer bankruptcy. Your lawyer can ensure that you follow the proper procedures and file for bankruptcy in good faith. A lawyer can also provide a more in-depth explanation of the BAPCPA’s requirements and guide you through the entire bankruptcy process.

Changes to a Chapter 7 Bankruptcy

Since the BAPCPA went into effect in October of 2005, the law has been harshly criticized for its favorable treatment of creditors over debtors in U.S. bankruptcy cases. While its inception resulted in major amendments to consumer bankruptcy laws, the provisions of the BAPCPA have predominantly remained the same. This is why it is not surprising that many politicians throughout the years have included it as part of their campaign strategies and platforms.

One of the most significant consequences of BAPCPA is how it changed the nature of filing for Chapter 7 bankruptcy. Prior to its enactment, it was a lot easier and cheaper for consumers to seek relief from debt. As previously mentioned, BAPCPA made it much harder and more expensive for individuals to file for Chapter 7.

Specifically, one of the strictest requirements that stems from BAPCPA is the passing of the “means test”. The means test is one of the conditions that a petitioner must meet in order to qualify for Chapter 7 bankruptcy. The test provides that a petitioner’s income must be below or equal to the median income level in their state. If their income level is above the median income level in their state, they will need to pass a second test.

This second test is performed by comparing the petitioner’s monthly income against their monthly essential expenses, such as groceries, medications, and so forth. If the petitioner fails this test as well, then they will be forced to convert their filing to a Chapter 13 bankruptcy. The ramifications for this conversion will be discussed in the section below.

BAPCPA also made it harder to discharge certain debts like student loans. In other words, a debtor could no longer use bankruptcy as a way to get out of paying off overdue bills and accrued interest.

From an administrative standpoint, it also increased the amount of paperwork and the cost of filing fees to petition for both Chapter 7 and Chapter 13 bankruptcy.

In addition, a debtor will also need to complete a pre-bankruptcy credit counseling course before for filing for Chapter 7 bankruptcy. This course was not a prerequisite before the BAPCPA was enacted. In some cases, a debtor will also have to undergo money management classes as well as another debt education course after they receive a discharge.

Finally, one other substantial change that the BAPCPA created were the conditions of the automatic stay. Before the law was implemented, debtors could use the automatic stay as a protective measure against losing their assets. The law sought to abolish this practice by restricting automatic stays in two ways. The first is by placing a 30-day limit on the automatic stay if the debtor’s case was dismissed the year prior.

The second restriction applies to debtors who have filed more than two bankruptcy cases within a year. The rule states that the debtor cannot receive an automatic stay until they petition the court to issue one by demonstrating that their most recent case was filed in good faith.

Thus, as evidenced by the above information, the BAPCPA has posed many new hurdles for consumers attempting to file for Chapter 7 bankruptcy.

Changes to a Chapter 13 Bankruptcy

In regard to Chapter 13 bankruptcy, a debtor will still need to complete the pre-bankruptcy credit counseling course and calculate their median income level. One difference between Chapter 13 and Chapter 7 bankruptcy that resulted from BAPCPA is that a debtor may not file more than one time in six years under Chapter 7, and not more than one time in eight years under Chapter 13.

Another difference between the two under the law is that Chapter 13 filing fees cost a lot more than Chapter 7. Also, Chapter 13 bankruptcy cases are more expensive than Chapter 7 bankruptcy cases in general because they require the debtor to restructure (as opposed to eliminate) their debts. Specifically, this requirement is known as the Chapter 13 repayment plan. The debtor must create a reasonably feasible plan to submit to the court for approval.

Under the BAPCPA, a debtor will have between 3 to 5 years to repay their debts. If the debtor experiences an issue or realizes they will not be able to complete the plan on time, they may request an extension from the court. In cases where a debtor runs into a problem that causes extreme financial hardship, they may be able to have their case converted from Chapter 13 to Chapter 7.

Lastly, one final effect that BAPCPA had on Chapter 13 bankruptcies is that it has caused more debtors to file for Chapter 7. Between the amount of legal costs, court fees, and the requirement to pay off a majority of the debt, many petitioners end up having to convert their cases to Chapter 7 after a couple of years.

This means that despite following a repayment plan and consistently paying down debts, a debtor may still be forced to file for Chapter 7, which tends to have greater consequences than those associated with a Chapter 13 bankruptcy filing.

What Does the Part About Credit Counseling Mean?

As briefly discussed above, the 2005 bankruptcy bill imposed a mandatory pre-bankruptcy credit counseling course that debtors must complete prior to filing for Chapter 7 or Chapter 13 bankruptcy. The purpose of this requirement is to ensure that debtors understand that bankruptcy should be used as a last resort and to inform them about the other options they can choose from first.

The requirement states that a debtor must attend a pre-bankruptcy credit counseling course from an approved credit counseling agency 180 days (i.e., 6 months) prior to filing a petition for bankruptcy with a federal bankruptcy court. The debtor will also need to obtain proof (usually in the form of a certificate) that shows they completed the course and will have to submit it along with their other bankruptcy filing documents.

In addition, debtors who file for Chapter 7 bankruptcy must complete a set of money management classes as well. Failure to comply with the above requirements can result in a dismissal of a bankruptcy case and may preclude a debtor from filing again in the future. At the very least, the debtor will need to pay extra filing fees to re-submit their petition after they finish the courses.

Thus, it is best that a debtor adheres to all of BAPCPA’s requirements as strictly as possible to reduce their chances of having to spend more money and to avoid having their request for relief delayed or denied. To ensure a smoother bankruptcy process, a debtor should consult a local bankruptcy lawyer for further guidance.

Do I Need a Bankruptcy Lawyer?

The federal U.S. Bankruptcy Code is constantly being amended. While minor changes to rules may be easy to understand, major adoptions like the BAPCPA are more complicated and can have a detrimental impact on a debtor filing for bankruptcy. Therefore, if you have any questions about bankruptcy law or need assistance with filing for bankruptcy, it may be in your best interest to speak to a local bankruptcy lawyer for further legal advice.

An experienced bankruptcy lawyer can inform you about any updates in the law and will be able to discuss how recent amendments may affect your requirements for filing. Your lawyer can also help you prepare and file your bankruptcy documents with the proper court, and provide representation during a bankruptcy proceeding.