BANKRUPTCY UPDATES

The Bankruptcy Law Change One Year Later

In this section of Total Bankruptcy, you will learn about:

• the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
• filing bankruptcy under the new law
• the new bankruptcy law and the Chapter 7 bankruptcy means test
• bankruptcy filings after the new bankruptcy law
• how the new bankruptcy law affects you
• the bottom line with the new bankruptcy law

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005

The consumer credit industry lobbied Congress for nearly ten years in an effort to pass the kind of bankruptcy reforms adopted in 2005. The industry went to great lengths to paint a picture of consumers using bankruptcy as a means of financial planning, running up huge credit card bills with complete disregard for their ability to repay them, and then discharging them in bankruptcy when the well ran dry. On October 17, 2005, the changes they'd been pushing for more than a decade took effect. But the impact hasn't been quite what the credit industry intended.

Filing bankruptcy under the new law

Not really. It's certainly "harder" in the sense that it takes more work. And that may work to the advantage of the credit industry, since some consumers will be discouraged by the additional requirements. However, with the assistance of a local bankruptcy attorney, the process is still quite manageable.

In the more significant sense, it's not much harder to file for bankruptcy than it was a year ago. The new legislation was supposed to weed out "abusive" filers-the ones the credit industry thought were running up credit card bills knowing that they could "always file bankruptcy". But the industry (and Congress) overlooked some very important information-information that consumer bankruptcy attorneys and other consumer advocates attempted repeatedly to share with them. Those "abusive" filers made up a very small percentage of bankruptcy petitioners. The vast majority of people who file for bankruptcy do so because of huge medical bills not covered by insurance, divorce, job loss, or a death in the family.

Early reports from credit counseling agencies indicated that fewer than 4% of prospective bankruptcy petitioners had any other realistic options.

Fortunately, very few people are actually disqualified from filing for bankruptcy protection under the new law.

The Chapter 7 Means Test

Very few people are disqualified by means testing. The Chapter 7 means test was much touted as the means by which the bankruptcy process would weed out those abusive filers, people who didn't really need to file for bankruptcy protection and just didn't feel like paying their bills. And perhaps the means test does that, but the overall impact is very small because there are (and always have been) so few bankruptcy petitioners in that situation.

The means test is a two-step process. The first step compares the debtor's income to the median income in his state. If his income is lower than the median income for his family size, the test ends there. There is no presumption of abuse, and the debtor can file for Chapter 7 bankruptcy.

For most Chapter 7 bankruptcy petitioners, the means test ends there. However, even when the debtor's income exceeds the median income in his state, he may still qualify for Chapter 7 bankruptcy depending upon his expenses. Early reports indicate that fewer than 5% of potential Chapter 7 bankruptcy filers are disqualified by the means test.

The Law's Effect on Total Bankruptcy Filings

Immediately after the law change, bankruptcy filings dropped dramatically. That wasn't a surprise, since hundreds of thousands of people filed for bankruptcy in the weeks leading up to the law change. However, those numbers have been steadily climbing. There were only 5,460 consumer Chapter 7 bankruptcy petitions filed across the country in November, 2005. By March, the monthly total had climbed to more than 30,000.

Bankruptcy filing rates haven't reached pre-law-change levels yet, but appear to be steadily climbing in that direction. In a recent survey conducted by the National Association of Consumer Bankruptcy Attorneys (NACBA), more than 57% of consumer bankruptcy attorneys surveyed predicted that filings would reach pre-BAPCPA levels by the second anniversary of the law change or sooner. In 2007, bankruptcy filings were up 40% from the previous year, with some experts predicting more than a million filings for 2008.

Will the Law Impact My Bankruptcy Filing?

There are some new requirements for bankruptcy petitioners. First, you'll have to complete an approved Credit Counseling Briefing before you file for bankruptcy. If you're planning to file for Chapter 7 bankruptcy, you'll have to "pass" the means test.

Your attorney has new obligations to verify the information you provide, which makes the bankruptcy process a bit more expensive and time consuming. Your bankruptcy lawyer will have to obtain valuations on some of your property, your credit report, tax transcripts, and other documentation.

Before you receive your discharge, whether you've filed for Chapter 7 bankruptcy or Chapter 13 bankruptcy, you'll have to complete an approved Debtor Education Course.

The Bottom Line: Can I still file for bankruptcy?

Almost certainly, yes. A very small number of potential bankruptcy filers are impacted by the Chapter 7 means test. For everyone else, bankruptcy works pretty much just like it always did, except that there are a few extra steps involved. And even those few people who might be disqualified by the Chapter 7 means test can usually still opt to file under Chapter 13.

A local bankruptcy attorney can assess your situation specifically. If you're considering bankruptcy, get direct answers and fill out a free case evaluation to speak with a bankruptcy attorney near you.

The above summary is not legal advice. Laws may have changed since our last update. For the latest information on bankruptcy laws, speak to a local bankruptcy lawyer in your state.