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 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 happened because of this bankruptcy law.
Mandatory Credit Counseling Under the BAPCPA
You must take a credit counseling course within 180 days before filing for bankruptcy and submitting your filing fee.
You can get more information on the credit counseling procedure before filing your bankruptcy petition from the U.S. Trustee Program. This program can also provide you with a list of approved credit counseling agencies.
The U.S. Trustee Program is a component of the Department of Justice. It's responsible for overseeing the administration of bankruptcy cases. See Bankruptcy Credit Counseling for more details.
Stricter Eligibility for Chapter 7 Filing
Chapter 7 bankruptcy, also known as liquidation, allows you to have some of your unsecured debts discharged. Under the BAPCPA, you must meet certain eligibility requirements under a means test to file for Chapter 7 bankruptcy.
Under the means test, generally, if your current monthly income is less than the median income in your state, you may file for Chapter 7. If not, you can't file under Chapter 7—you must file a Chapter 13 bankruptcy.
Tax Returns and Proof of Income Required
Under the 2005 bankruptcy law, those wishing to file bankruptcy under Chapter 7 or Chapter 13 must show proof of their disposable income. They can't do this by providing federal tax returns from the last tax year.
If a bankruptcy filer has not filed their required tax return for the previous one or two tax years, they may be required to do so before the bankruptcy can be filed, i.e., if they were employed and required to file a tax return for that time period.
More Filings Under Chapter 13
For those ineligible for filing under Chapter 7 based on the means test, the only bankruptcy option is to file under Chapter 13 (reorganization) instead.
There are a few major differences between these two types of bankruptcy, including how long each one stays on your credit report. The main distinction is that the Chapter 13 debtor enters into a three to five-year repayment plan in which they must pay a certain amount of money to creditors. This payment plan is based on an expenses-to-income formula. For more details, read about 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 secured and unsecured creditors and others. This includes protection from:
- Most debt collection
These protections are part of the automatic stay effect of a bankruptcy filing because many potential legal actions against the filer are stopped.
But these protections have been eliminated under the new BAPCPA bankruptcy rules. For example, filing for bankruptcy no longer delays or stops the following:
- Eviction actions where a judgment has already been entered
- Driver's license suspensions
- Legal actions for child support
- Divorce proceedings
New Priority for Unpaid Child Support and Alimony
Bankruptcy laws provide a system of repayment priority for people and companies that are owed money, also known as creditors. Under the new bankruptcy law, the bankruptcy trustee will pay people who are owed unpaid child support and alimony ahead of other creditors. That means the bankruptcy filer's family members take priority over other lenders, including student loans.
Mandatory Financial Management Education
After filing for bankruptcy and often after the conclusion of the meeting of creditors, bankruptcy debtors must participate in a government-approved financial management education program. Only after that will the bankruptcy court 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 or local rules may impact your eligibility. Remember that bankruptcies can stay on your credit report for up to 10 years. This can affect your ability to open a credit card or receive personal loans.
Legal advice from a bankruptcy attorney can help you succeed. A lawyer can help identify your liabilities, understand bankruptcy forms, and identify any exemptions in your state so you can keep your personal property or real estate. Contact a local bankruptcy attorney experienced with the Bankruptcy Code (U.S.C. Title 11). Learn how they can help improve your financial affairs.
See here for information on how BAPCPA affects Subchapter V's Chapter 11 bankruptcy for small businesses (less than 1% of bankruptcies filed in 2022).