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Bankruptcy: Changes in the Law Under BAPCPA

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was passed by Congress and signed into law by President Bush in April 2005. Some of the reforms included tightened eligibility requirements and an emphasis on consumer education.

Changes instituted by this law took effect on October 17, 2005. Below are some of the key changes that came about as a result of this bankruptcy law.

Mandatory Credit Counseling Under the BAPCPA

You must now take a credit counseling course in a government-approved program pre-bankruptcy.

You can get more information on the procedure for credit counseling before filing your bankruptcy petition (and a list of approved credit counseling agencies) from the U.S. Trustee Program (a component of the Department of Justice responsible for overseeing the administration of bankruptcy cases). See Bankruptcy Credit Counseling for more details.

Stricter Eligibility for Chapter 7 Filing

Under the BAPCPA, if you want to file a Chapter 7 bankruptcy case, you must meet certain eligibility requirements under a "means test."

Under the "means test," if your current monthly income is less than the median income in your state, you can file for bankruptcy under Chapter 7. But if your current monthly income is above the median income in your state, and you can afford to pay $100 per month toward paying off your debt, you cannot file under Chapter 7 and must proceed under Chapter 13 (more on Chapter 13 below).

Whether you can afford to pay $100 per month (or $6,000 over a five-year period) is based on a formula that includes your monthly income, your expenses, and the total amount of your debt. Get more information on means testing from the U.S. Trustee Program.

Tax Returns and Proof of Income Required

Under the 2005 bankruptcy law, people wishing to file bankruptcy under Chapter 7 or Chapter 13 must show proof of their disposable income by providing federal tax returns from the last tax year. If a bankruptcy filer has not paid their required taxes for the previous tax year, they must do so before the bankruptcy can proceed.

More Filings Under Chapter 13

As discussed above, if you are ineligible for filing under Chapter 7 based on the "means test," you must file under Chapter 13 (reorganization) instead.

There are a number of major differences between Chapter 7 and Chapter 13 bankruptcy. But the main distinction is that the Chapter 13 debtor enters into a five-year repayment plan in which they must pay a certain amount of money to creditors, based on a strict expenses-to-income formula. For a detailed look, see Chapter 7 vs. Chapter 13 Bankruptcy.

Fewer "Automatic Stay" Protections for Filers

People who file for bankruptcy have traditionally been entitled to certain immediate protection from both secured and unsecured creditors and others, including most debt collection and foreclosures. These protections are part of what is called the "automatic stay" effect of a bankruptcy filing, because many potential legal actions against the filer are stopped (known as "stayed" in legal terms).

But under the new bankruptcy law which took effect in October 2005, some of these protections have been eliminated. For example, filing for bankruptcy no longer delays or stops the following:

  • Eviction actions
  • Driver's license suspensions
  • Legal actions for child support, or
  • Divorce proceedings

New Priority for Unpaid Child Support and Alimony

Bankruptcy laws provide a system of re-payment priority for people and companies that are owed money (called "creditors"). Under the new bankruptcy law, the bankruptcy trustee will first pay people who are owed unpaid child support, and alimony. That means the bankruptcy filer's family members take priority over any other lender. See Child Support and Bankruptcy to learn more.

Mandatory Financial Management Education

After the conclusion of the meeting of creditors and other bankruptcy proceedings, bankruptcy debtors must participate in a government-approved financial management education program. It's only after that the bankruptcy court will grant you a bankruptcy discharge.

You can get more information on the procedure for financial management education (and a list of approved debtor education providers) from the U.S. Trustee Program.

Questions About Changes in Bankruptcy Law? Talk to a Lawyer Today

If you're considering filing for bankruptcy, changes in the law may impact the process and your eligibility. A lawyer can ensure that you exercise your rights and hold onto as much of your property as possible while resolving your debt crisis. Contact a local bankruptcy attorney and learn how they can help chart a course through bankruptcy's treacherous waters.

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