Bankruptcy Abuse Prevention and Consumer Protection Act
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (USStatute|109|8|119|23|2005|04|20), providing for significant changes in
bankruptcy in the United States, was passed by the 109th United States Congresson April 14, 2005 and signed into law by President George W. Bushon April 20, 2005. The effective date for most of its provisions apply to cases commenced on or after October 17, 2005. Referred to colloquially as the "New Bankruptcy Law", the Act of Congress attempts to make it more difficult for consumers to discharge debt under Chapter 7; some of these consumers may instead utilize Chapter 13.
The Bankruptcy Abuse Prevention and Consumer Protection Act made sweeping changes to American bankruptcy laws, affecting both consumer and business bankruptcies. Many of the bill's provisions were explicitly designed by the bill's Congressional sponsors to make it "more difficult for people to file for bankruptcy." [ [http://grassley.senate.gov/index.cfm?FuseAction=PressReleases.View&PressRelease_id=4878 "Opening Statement of Sen. Chuck Grassley at the Bankruptcy Reform Hearing"] Senate Committee on the Judiciary.] ] Some of the bill's more significant provisions include the following:
Means test for Chapter 7
Although the BAPCPA was intended to make it more difficult for debtors to file a Chapter 7 Bankruptcy--under which most debts are forgiven (or discharged)--and instead force debtors to file a Chapter 13 Bankruptcy--under which debts are repaid under a plan--the Act has not been effective in practice. 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 testto determine whether filers have enough income to pay some portion of their debts, and thus file under Chapter 13. [Sahadi, Jeanne. [http://money.cnn.com/2005/10/17/pf/debt/bankruptcy_law/index.htm "The new bankruptcy law and you"] . "CNNMoney.com", October 17, 2005. Retrieved on April 12, 2007.]
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 Servicedetermined 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
alimonyand child supportpayments 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).
Additional requirements for filers
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 counselingvia 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 but before the bankruptcy is discharged.Fact|date=August 2008
*"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
*"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 attorneys 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.
Limits to the homestead exemption
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. Simpsondid 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-
ERISApension plans like private sector 403(b)s and some Individual Retirement Accountthat ERISA plans had enjoyed thereby making these plans more similar to ERISA plans.
The 2005 bankruptcy bill was actually first drafted in 1997 and first introduced in 1998. The
United States House of Representativesapproved a version titled the "Bankruptcy Reform Act of 1999" and the Senate approved a slightly different version in 2000. [ [http://www.thomas.gov/cgi-bin/query/D?c106:7:./temp/~mdbsvVJI7k:: Text of Bankruptcy Reform Act of 1999] .] After the differences in the bills were reconciled, Congress passed the "Bankruptcy Reform Act of 2000". President Clinton, however, employed what is known as a " pocket veto" by waiting for the lame-duck congressional session to adjourn without signing the bill, a legislative maneuver tantamount to a veto. [ [http://thomas.loc.gov/cgi-bin/query/D?c106:5:./temp/~c1063e2UQG:: Full text of bill] ] [ [http://archives.cnn.com/2000/ALLPOLITICS/stories/12/20/clinton.bankruptcy.ap/index.html "Clinton vetoes bankruptcy bill."] "CNN.com", December 20, 2000. Retrieved on April 11, 2007.]
In the years since 2000, the bill was introduced in each Congress, but was repeatedly shelved due to threats of a filibuster from its opponents and because of disagreements over various amendments, including one backed by Senate Democrats that would have made it harder for
anti-abortion groupsto discharge court fines related to felony convictions. [ [http://www.aba.com/Industry+Issues/Bankruptcy_Reform_Main_Menu.htm Industry Issues: Bankruptcy Reform ] ]
The increase in Republican majorities in the Senate and House after the 2004 elections breathed new life into the bill, which was introduced in its current form by the chairman of the
Finance Committee, Republican Senator Chuck Grassleyof Iowa. [ [http://www.thomas.gov/cgi-bin/query/D?c109:23:./temp/~mdbs1BEGPD:: Full text of legislation.] ] The bill was supported by President George W. Bush. Tom DeLayalso championed the controversial legislation. The bill passed by large margins, 302-126 in the House [ [http://clerk.house.gov/evs/2005/roll108.xml:: House roll call.] ] and 74-25 in the Senate [ [http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=109&session=1&vote=00044:: Senate roll call.] ] , and was signed into law by President Bush.
Support for the act mostly came from banks, credit card companies, and other creditors. [Harvey R. Miller, "Chapter 11 in Transition - From Boom to Bust and Into the Future", 81 Am. Bankr. L.J. 375, 388 (2007)]
The 2005 bankruptcy bill was opposed by a wide variety of groups, including consumer advocates, legal scholars, retired bankruptcy judges, and the editorial pages of many national and regional newspapers. While criticisms of the bill were wide ranging, the central objections of its opponents focused on the bill's sponsors' contention that bankruptcy fraud was widespread, the strict means test that would force more debtors to file under Chapter 13 (under which a percentage of debts must be paid over a period of 3-5 years) as opposed to Chapter 7 (under which debts are paid only out of existing assets), the additional penalties and responsibilities the bill placed on debtors, and the bill's many provisions favorable to credit card companies. Opponents of the bill regularly pointed out that the credit card industry spent more than $100 million lobbying for the bill over the course of eight years.Egan, Timothy. [http://www.nytimes.com/2005/12/11/national/11credit.html " Newly Bankrupt Raking In Piles Of Credit Offers."] The New York Times, December 11, 2005. Retrieved on April 4, 2008.] There has also been significant criticism of BAPCPA's changes to Chapter 11 business bankruptcies. [Harvey R. Miller, "Chapter 11 in Transition - From Boom to Bust and Into the Future", 81 Am. Bankr. L.J. 375, 387-88 (2007)] Harvey Miller, one of the most-prominent bankruptcy attorneys in the country (particularly in terms of representing corporate debtors) has described BAPCPA as "ill-conceived." [Harvey R. Miller, "Chapter 11 in Transition - From Boom to Bust and Into the Future", 81 Am. Bankr. L.J. 375, 388 (2007)]
One of the primary stated purposes of the bankruptcy bill was to cut down on abusive or fraudulent uses of the bankruptcy system. As Congressman F. James Sensenbrenner Jr. (R-Wis), one of the bill's key supporters in the House, argued, "This bill will help restore responsibility and integrity to the bankruptcy system by cracking down on fraudulent, abusive, and opportunistic bankruptcy claims." [Day, Kathleen. [http://www.washingtonpost.com/wp-dyn/articles/A53688-2005Apr14.html "Bankruptcy bill passes; Bush expected to sign.] " "The Washington Post," April 15, 2005; Page E01. Retrieved on April 12, 2007.] Opponents of the bill argued that claims of bankruptcy abuse and fraud were wildly overblown, and that the vast majority of bankruptcies were related to medical expenses and job losses. Their arguments were supported by an in-depth study by
Harvard Universitymedical and legal scholars, which found that more than half of bankruptcies were attributable to unpaid medical bills. [Himmelstein, David U., Elizabeth Warren, Deborah Thorne, andSteffie Woolhandler. [http://content.healthaffairs.org/cgi/content/full/hlthaff.w5.63/DC1 "MarketWatch:Illness And Injury As Contributors To Bankruptcy."] "Health Affairs", February 2, 2005. Retrieved on April 12, 2007.]
Perhaps the most controversial provisions of the bill was the strict means test it established to determine whether a debtor's filing under Chapter 7 of the bankruptcy code would be considered as an "abuse" and therefore subject to dismissal. This decision was previously made by a
bankruptcy courtjudge, who would evaluate the particular circumstances that led to a bankruptcy. Critics of the means test, which is triggered if a debtor makes more than their state's medianincome, argued that it ignored the many causes of individual bankruptcies, including job loss, family illnesses, and predatory lending, and would force debtors seeking to challenge the test into costly litigation, driving them even further into debt. [Sabatini, Patricia. [http://www.post-gazette.com/pg/05116/494270.stm "New law's 'means' test just mean, bankruptcy experts say."] "Pittsburgh Post Gazette", April 26, 2005. Retrieved April 12, 2007.]
Besides the stricter means test, opponents of the bill also objected to the many other obstacles the bill creates for individuals seeking bankruptcy protection. These included more detailed reporting requirements, higher fees, mandated
credit counseling, and the additional liability placed on bankruptcy attorneys, which critics argued would drive up attorneys' fees and decrease the number of lawyers willing to help consumers file. [Sahadi, Jeanne. [http://money.cnn.com/2005/10/17/pf/debt/bankruptcy_law/index.htm "The new bankruptcy law and you"] . "CNNMoney.com", October 17, 2005. Retrieved on April 12, 2007.] These criticisms have been borne out in the months following the new law, as lawyers have reported that the bankruptcy process has become significantly more arduous, forcing them to charge higher fees and take fewer clients. [Gertner, Reni. [http://findarticles.com/p/articles/mi_qn4185/is_20060506/ai_n16353787 "Lawyers reflect on first six months of bankruptcy reform"] . "St. Louis Daily Record & St. Louis Countian," May 6, 2006. Retrieved on April 12, 2007.] The many provisions beneficial to credit cardcompanies were also a major target of the bill's opponents. In particular, critics objected to the extension to eight years from six to the time before which debtors could liquidate their debts through bankruptcy, and requirements that those who file for multiple bankruptcies pay previous credit card debt that would have been forgiven under the old law. The bill's opponents were especially critical of provisions that prioritize the repayment of credit card debtover unpaid child support, forcing spouses owed alimony to fight with credit card companies and other lenders for their unpaid support. More broadly the bill's critics argued that the legislation did nothing to curtail the predatory practices of credit card companies, such as exorbitant interest rates, rising and often hidden fees, and targeting minors and the recently bankrupt for new cards. The bill's critics pointed out that these practices are themselves significant contributors to the growth of consumer bankruptcies. [ [http://judiciary.senate.gov/testimony.cfm?id=1381&wit_id=3996 "Testimony of Professor Elizabeth Warren to the U.S. Senate Judiciary Committee"] , February 10, 2005. Retrieved on April 12, 2007.]
Hurricane Katrina bankruptcies
Jim Sensenbrenner, Republican chairman of the
House Judiciary Committeenoted "If someone in Katrina is down and out, and has no possibility of being able to repay 40 percent or more of their debts, then the new bankruptcy law doesn't apply. [" [http://www.consumeraffairs.com/news04/2005/katrina_bankruptcy03.html No Bankruptcy Relief for Katrina Victims] , ConsumerAffairs.Com, September 15, 2005. Accessed April 4, 2008.]
The Justice Department's US Trustee program has since said it would relax the strict Chapter 7 rules for disaster victims, including those affected by Hurricane Katrina. The Justice Department trustees oversee the administration of bankruptcy cases, and have discretion in ruling over bankruptcy filings. They also said the trustees would not challenge debtors who couldn't meet paperwork requirements because documents were destroyed by the hurricane, and that victims of Hurricane Katrina may skip the credit counseling requirement before filing.
* [http://clerk.house.gov/evs/2005/roll108.xml House Roll Call Vote.]
* [http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=109&session=1&vote=00044 Senate Roll Call Vote.]
* [http://www.consumeraffairs.com/news04/2005/katrina_bankruptcy03.html No Bankruptcy Relief for Katrina Victims]
* [http://www.uscourts.gov/bankruptcycourts/resources.html US Courts Bankruptcy Reform Page]
* [http://ws5.com/bankruptcy/ Bankruptcy Reform 2005 Law Changes Summary]
* [http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm US Trustee]
* [http://www.recordonline.com/archive/2005/03/06/minwag.htm Minimum wage, bankruptcy plans up for Senate vote The Associated Press]
* [http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm US Trustee Means Testing page with Median Income Table]
* [http://www.usdoj.gov/ust/eo/bapcpa/ccde/ US Trustee Credit Counseling & Debtor Education Information]
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