In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act after a major lobbying effort by the credit industry. Despite its name, the new bankruptcy laws made things significantly more difficult for individual debtors, limiting their filing options and imposing a number of new requirements.
CREDIT COUNSELING
In order to file under Chapter 7 or 13, an individual must complete a course of credit counseling offered by an approved agency. Without a certificate evidencing completion of the course, a debtor simply cannot file.
DEBTOR EDUCATION
A related provision requires those same filers to attend a course in financial management while the case is pending. Failure to complete the course allows the court to dismiss the bankruptcy case entirely.
REPEAT FILINGS
The new bankruptcy laws increased the time that a debtor must wait between Chapter 7 filings from six years to eight. A debtor can file under Chapter 13 four years after a Chapter 7 case, two years must elapse between successive Chapter 13 filings and a Chapter 7 case cannot follow a Chapter 13 filing until six years have passed. A case filed in violation of any of the waiting periods can be dismissed.
THE MEANS TEST
The means test, like many provisions of the new law, was enacted in response to purportedly widespread bankruptcy abuse. Its objective is to force the debtor into Chapter 13, which requires a repayment plan, and away from Chapter 7, in which many debts are simply eliminated. The new law does this by applying a test to the debtor’s financial situation. Should the debtor fail that test, a Chapter 7 filing is presumed to be abusive and the debtor must either convert to Chapter 13 or see his petition dismissed.
In simplest terms, the means test begins by comparing the debtor’s income to the median income in the state in which bankruptcy is filed. If that debtor’s income exceeds the median, the means test subtracts a variety of expenses, including living expenses as defined by the IRS and a handful of other expenses allowed by the new bankruptcy law itself.
Once those calculations are complete, the means test applies two different formulas to determine what remains to pay unsecured creditors. If even a relatively small amount is available under either formula, the Chapter 7 filing is presumed to be abusive.
DISCHARGEABILITY
Bankruptcy law has long had provisions that classified debt incurred shortly before filing and used to obtain “luxury goods” as fraudulent and therefore non-dischargeable. The new bankruptcy law changes the value of what constitutes a luxury item from $1,250 to $500 and reduces the time from 90 to 60 days.
Prior law divided student loan debt into non-dischargeable government loans and dischargeable private loans. The new law makes no such distinction, so that no student loans are dischargeable, regardless of the source.
HOMESTEAD LIMITATION
In the past, debtors could move to a state with favorable homestead provisions and immediately shelter assets through the new state’s homestead exemption. The new law limits the value of the exemption if the home was purchased within 1,215 days of filing. In addition, if the debtor has moved to the new state within two years of filing, the law looks to the debtor’s state of residence prior to the two-year period in determining exemptions available to the debtor.
