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Sweeping Changes in 2005

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was signed into law in April 2005 and went into effect on October 17, 2005. This act, designed to curb instances of bankruptcy fraud, had a direct impact on chapter seven bankruptcies. The most significant change was a requirement for chapter seven filers to pass a means test to determine whether they might be able to file chapter thirteen and pay back their debts over a five-year period. Debtors whose income was above the state median (variable based on the number of people in the debtor’s household) would be required to file chapter thirteen. Even those deemed eligible to file for chapter seven would still face stricter requirements. Mandatory debt counseling must be completed within 180 days prior to filing for bankruptcy and the debtor must provide a certificate of counseling. The debtor must also supply additional proof of assets, including the most recent year’s tax return, evidence of payment from employers made 60 days before filing, and other forms and documents (including a photo ID). The amount of time before a debtor can file again for chapter seven bankruptcy has risen from six years to eight years.

Banks and credit card agencies hailed the new act as a much-needed check on an easy way out of paying legitimate debts (in 2003 there were 1.6 million filings for personal bankruptcy). Consumer advocates claimed that the new act punished those who were legitimately seeking relief and who now would have a harder time trying to get a fresh start. One development that could have an impact on this issue was a change in regulations regarding minimum monthly payments on credit card accounts. The federal government compelled banks and other credit card issuers to raise the minimum monthly payments, in some cases to double what they had been. While such a change could be a hardship on borrowers who may have trouble making higher payments, ultimately it could help lower outstanding debt by getting people to pay their credit card bills down more quickly.

In October 2005, the U.S. Department of Justice announced that it would grant temporary waivers to chapter seven filers who were affected by Hurricane Katrina, which devastated Louisiana and Mississippi. Victims of the hurricane were given additional time to get the necessary paperwork and debt counseling requirements completed before filing for bankruptcy.

Inside Sweeping Changes in 2005