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Consumer Protection Act 2005

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is a law that made several significant changes to the U.S. Bankruptcy Code. It was passed by the 109th United States Congress on April 14, 2005 and signed into law by President George W. Bush on April 20, 2005.

Means test for Chapter 7 Although the intent of the law was to make it more difficult for individuals to file for bankruptcy under Chapter 7, under which most of their debts are forgiven (or discharged) and to force individuals to file under Chapter 13 under which part of all of the debts are repaid under a plan, it has, in practice, not substantially made a large effect. Approximately 85% of debtors are not subject to its “means test” and a large percentage of the rest are able to “pass” the means test.

Under the old law, filers had a presumption of eligibility to file under Chapter 7, with the final determination made by bankruptcy judges, who evaluated the specific nature of each bankruptcy. In lieu of this judicial discretion, the new law substitutes a means test to determine whether filers have enough income to pay some portion of their debts, and thus file under Chapter 13.

The means test applies to filers whose gross income (based on the six month period prior to filing), is above the median income in their state. Individuals whose incomes are below the median automatically qualify for Chapter 7. Filers whose incomes are above the median must then calculate their Disposable Monthly Income (DMI) to determine whether they are able to make payments on their debts sufficient to qualify them for Chapter 13. The DMI is determined by subtracting priority debt payments, secured debt payments, Internal Revenue Service determined expense allowances, taxes and certain other expenses from a filer’s monthly income. If the DMI is less than $100 per month, they are permitted to file under Chapter 7. If the DMI is above $100, they must file under Chapter 13.

This formula effectively rewards filers with assets that are heavily mortgaged and hurts debtors with larger amounts of unsecured debt. Since alimony and child support payments are “priority debts” it also has the effect of making it easier for people who owe back domestic support obligations (such as “deadbeat dads”) to file under Chapter 7 than other debtors (but the child support is not dischargeable).

The new law adds a number of new requirements for bankruptcy filers that attempt to make the filing process more difficult and costly. These additional requirements include:

• Mandatory credit counseling and debtor education. All potential bankruptcy filers must now undergo credit counseling via an “approved nonprofit budget and credit counseling agency” prior to filing for bankruptcy. Chapter 13, Chapter 7, and Chapter 11 filers must also complete a course in “personal financial management” after filing the bankruptcy.

• Additional filing requirements and fees. The new law increases the amount of paperwork involved in filing and raises the filing fees. The law also allows filing fees to be waived for debtors earning below 150 percent of the federal poverty level.

• Increased attorney liability and costs. Attorneys representing bankruptcy filers are now required to conduct an investigation of their clients’ filings and can be held personally liable for inaccuracies. Most bankruptcy attorneys predicted that this will result in increased attorney’s fees and will make attorneys less likely to take on some cases. In addition, bankruptcy filings are now subject to audit in a manner similar to tax returns.

• Fewer automatic protections for filers. The new law eliminates some of the protections bankruptcy filers previously had, such as stopping or delaying evictions, avoiding driver’s license suspensions, and delaying child support proceedings.

• Increased compliance requirements for small businesses. The new law increases the bureaucratic compliance obligations and shortens the deadline for Chapter 11 reorganizations involving small businesses, a series of new requirements not applicable to larger businesses.

• Increased amount of debt repayment under Chapter 13. The new law made several changes that effectively increased the amount of debt that Chapter 13 filers will have to repay. In addition, the “super discharge” provision, which allows filers to discharge many of their debts under Chapter 13 in return for agreeing to a payment plan, is significantly curtailed under the new law.

• Increased length of time between discharges. The new law increases the length of time from six to eight years between which a filer can receive a Chapter 7 discharge after a prior Chapter 7 case.

Under the new law, the homestead exemption, which allows bankruptcy filers in some states to exempt the value of their homes from creditors, is limited in various ways. If a filer acquired their home less than 1,215 days (40 months) before filing, or if they have been convicted of security law violations or been found guilty of certain crimes, they may only exempt up to $125,000 (adjusted periodically), regardless of a state’s exemption allowance. Filers must also wait 730 days before they are allowed to use their state’s exemptions.

These provisions were largely intended to prevent filers from forum shopping, i.e. moving assets and domiciles to a state with more favorable exemptions and filing. It was alleged that O.J. Simpson did this when he moved to Florida, which has an unlimited homestead exemption, and bought a multi-million-dollar residence and then filed for bankruptcy. Definitions of federal exempt property and the valuation rules for that property are also more precisely defined in a manner favorable to creditors compared to current law.

The new law allows creditors to pursue collection remedies without court permission in various circumstances such as offsetting tax refunds, pursuing tax and domestic relations litigation in all respects except the final turnover of assets from the estate, establishing wage assignments in domestic relations actions, repossessing vehicles and personal property subject to loans or leases 45 days after the first meeting of creditors in cases where no court action has been taken regarding that property, and allowing evictions that completed the court process prior to the filing of the petition or involve endangerment to property or drug use to proceed. The law also makes it easier for creditors who received preferential payments of less than $5,000 from the debtor before bankruptcy to avoid repaying such payments for the benefit of all creditors.

The law improves the ability of the bankruptcy estate to reclaim assets placed in asset protection trusts within ten years of filing or paid as employment bonuses to insiders within two years prior to filing.

The law makes Chapter 12 bankruptcy (farm reorganization) permanent while adding family fishermen, overhauls the treatment of complex financial contracts including many derivative contracts used by hedge funds, and overhauls the treatment of ancillary foreign bankruptcy proceedings.

The law extends protection to non-ERISA pension plans like private sector 403(b)s and some Individual Retirement Account that ERISA plans had enjoyed thereby making these plans more similar to ERISA plans.

Inside Consumer Protection Act 2005