More commonly known as the new bankruptcy laws, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was passed in April 2005 to streamline the bankruptcy filing processes in the US. The Act also aims to prevent any abuse of the system and fraud. The new laws made it somewhat difficult for consumers to file for bankruptcy under Chapter 7.
Consumers wishing to declare bankruptcy under Chapter 7 need to clear some tests as specified by the court and attend a credit counseling session. If one is an employed professional, his/her income must be less than the state median income of equivalent household. Else, he/she must file for Chapter 13 bankruptcy and make a repayment plan to the creditors.
The changes made in the bankruptcy laws can be broadly classified under three heads:
Changes in eligibility:
· Under the new rules, consumers can choose their bankruptcy codes - whether to file under Chapter 7 for liquidity or under Chapter 13 for repayment of assets. The law though imposes some restrictions on filing under Chapter 7.
· Under the new rule, if a consumer’s current income is less than the median income of the state for an equivalent household, he/she is eligible for filing for bankruptcy under Chapter 7. In case it is more than the state’s median income, the consumer has to clear a “means test” set by the court to qualify for Chapter 7. The “means test” judges whether the consumer has sufficient disposable income after deducting certain expenses. If the left over income is below a certain level, he/she can file for Chapter 7; else Chapter 13 is the only way out.
Counseling requirements:
A consumer must first attend and complete a credit counseling program with an agency approved by the United States Trustee's office. The purpose of this counseling is to provide the consumer knowledge of the situation and search possible alternatives. Counseling is mandatory for all and it does not end there. After the consumer is declared bankrupt, he/she must attend another session in order to learn personal financial management. Only then does the court close the case.
Lawyers:
The changes in the rules have also made it difficult for lawyers to scale up and modify their practice. As a result, lawyers have become difficult to find and more expensive. Their responsibilities have also increased, with the court requiring them to vouch for the accuracy of all information and spend more time with their clients.
