Bankruptcy is a legal condition of a financially troubled person or an organization, where that person or organization is unable to repay the financial obligations owed to creditors. Generally, a bankruptcy proceeding is initiated by the person in debt, and is activated by a court order.
On April 14, 2005, the US Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) and it came into force on April 20, 2005. The legislative intent behind enacting this Act, among other things, was to make it tougher for consumers to file for bankruptcy. This Act brought about significant changes to the personal finance sector including consumer and business bankruptcies. This law made it more difficult for consumers to file for Chapter 7 bankruptcy and instead required them to file for Chapter 13 bankruptcy. Most of the Chapter 7 bankruptcy cases tend to be forgiven whereas in Chapter 13 bankruptcy, debtors are discharged only after repayment of a portion of debts.
BAPCPA lays out a method to calculate and compare debtor’s income to median income in the debtor’s state. If it is found that the debtor’s income is above mean’s income, then the debtor has to go through another test called the means test. Monthly income is calculated as the average amount received by the debtor every month for a period of six months before bankruptcy filing. The means test is applicable only in case of consumer debts.
Pursuant to BAPCA a debtor will be eligible for Chapter 7 or Chapter 13 bankruptcy filing only if he/she receives a group or individual briefing from a U.S. trustee or bankruptcy administrator approved nonprofit budget and credit counseling agency within 180 days prior to filing. The Act also provides that all Chapter 7 or Chapter 13 debtors should complete an instructional course on management of personal finance. Failure to attend this course may be a ground for discharge denial.
Automatic stay in eviction proceedings has also been limited by BAPCPA. If a landlord obtains a possession judgment before bankruptcy filing then a stay will not stop the eviction process. Further, such a stay will not also be applicable over an eviction based on endangerment of a rented property or an eviction for illegal use of controlled substance in the property.
BAPCPA prescribes effective notice of bankruptcy to the creditor at the address that the creditor filed with the court. This Act offers better protection to creditors and limits the debtor’s ability to avoid liens through bankruptcy. Although BAPCPA is intended to make bankruptcy filing more difficult, there are several exceptions to this.
The passing of Bankruptcy Abuse Prevention and Consumer Protection Act was greatly supported by banks, credit card companies and other creditors as they were the industries most at risk of loss due to the increasing bankruptcy filings.