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The New Bankruptcy Law- BAPCA Overview


The Bankruptcy Abuse Prevention and Consumer Protection Act was signed into law by President George W. Bush on April 20, 2005.  This law made significant changes to the United States Bankruptcy Code. The law is sometimes referred to as “BAPCA” or the “New Bankruptcy Code. You may read the bankruptcy code here:
US Bankruptcy Code

The provisions of this law became effective for bankruptcy cases filed after October 17, 2005. Though it has been ten years since the law has gone into effect, the courts are still deciding important issues as to it’s meaning. The law was promoted by the credit card industry and it is generally agreed that the goal of the law was to make if more difficult for some consumers to file for bankruptcy.

Bankruptcy is still available to the vast majority of persons who need it, but the law does put new burdens on consumers and debtors counsel. In particular the means testing required by BAPCA  increases the work and legal fees involved.

BAPCA restricts the number of debtors who can declare chapter 7 bankruptcy and sets out a means test which calculates a debtor’s income and compares that income to the median income in the debtor’s home state.

The most important change made by BAPCA amendments occurred with in 11 U.S.C. Sec. 707(b). Congress amended this section to provide for dismissal or conversion of a Chapter 7 case upon a finding of “substantial abuse” by a debtor or married couple who have certain levels of income. The idea is to force more debtors out of Chapter 7 where most debts are forgiven and into Chapter 13 where the debtors must make payment on their debts over a period of years.

Post BAPCA, there are two kinds of “abuse” that can force Debtors into Chapter 13. “Abuse” may be found where the debtors income and allowable deductions create an un- rebutted presumption of abuse under the BAPCA created means test. 11. U.C.C. 707(b)(2) or by a finding of “bad faith” determined by a totality of the circumstances. 11 U.S.C. 707(b)(3). It is important to realize that even if a debtor “fails” the means test, they can still file a Chapter 7, it is just a question of rebutting the presumption of abuse, which involves showing the Court why a Chapter 7 bankruptcy is needed in a particular case.

Debtors whose income falls below the median figure for their state are safe from arguments that the filing is abusive owing the results of the “means test.” This creates a “safe harbor” for debtors whose income is below the state median. The availability of a chapter 7 case is only determined according to the totality of the circumstances in these cases. 11 U.S.C. 707(b)(3). In essence for debtors whose income is below the median, the bankruptcy code is the same as it was before the 2005 BAPCA changes.

The means test relies on Current Monthly Income or CMI, which is defined in 11 U.S.C. Sec. 101 (10A) as the monthly average income received by the debtor (and the debtor’s spouse) during the six calendar months preceding the bankruptcy filing. Current monthly income includes income from all sources with certain limited exceptions, like Social Security Income. It is important to realize that income during the six month period may be different than actual income at the filing of the case. This happens when the Debtor’s pay or job changes. Also, because the means test includes all income without adjustment, your lawyer has to be careful to examine the effect of a bonus, for example.


The means test does not apply if the debtor’s debt is not primarily consumer debt. That is if most of the debt is business debt then the means test does not apply.         

The median family income by state is available at the US Trustee’s website. Once you have that number the new Code requires a comparison between the debtor’s current monthly income and the median family income for the debtor’s state, for the debtor’s family size. It is therefore to debtors’ advantage to have as large a family size, to have as many people included, as possible.

If the debtor’s income exceeds the median income, then the debtor must apply the means test and apply certain deductions which are specified as to amount by the IRS. In some cases the expense deductions are the actual expense of the debtor, in other cases you must use the IRS average expense. Mortgage payments are actual and food expense is an IRS average, for example.
   

The deductions allowed on the means test are defined in 11 U.S.C. 707(b)(2)(A), (ii)-(iv) and include:

living expenses specified under the “collection standards of the Internal Revenue Service,”

actual expenses not provide by the Internal Revenue Standards including

reasonable and necessary health insurance, disability insurance, health savings account expenses, expenses for protection from family violence, continued expenses to care for non-dependent family members, actual expenses of administering a chapter 13 plan, expenses for grade and high school up to $1,500 annually per minor child provided the expenses are  reasonable and necessary, additional home energy costs above that listed in the IRS guidelines, 
1/60th of all secured debt that will become due in the next five years, 1/60th of all priority debt, and continued contributions to tax-exempt charities.

An itemized list of all applicable IRS living standards can be found at the US Trustee’s website

A presumption of abuse will arise if the debtor has (1) at least $182.50 in current monthly income available after the allowed deductions (this equals $10,950 over five years) regardless of the amount of debt or (2) the debtor has at least $109.59 of such income ($6575 over five years) and this sum would be enough to pay general unsecured creditors more than 25% over five years. If a presumption of abuse arises under the means test it can be rebutted by special circumstances 11 U.S.C. 707(b)(2)(A)(I).

If there is no presumption of abuse under the means test, only the US Trustee or the Court may seek dismissal or conversion of the case. If the debtor’s current monthly income is above the median and there is a presumption of abuse, then any party to the case can seek dismissal.

The grounds for dismissal under 11 U.S.C. 707(b)(3) for “bad faith” even if the debtors “pass” the means test are stated as a case where “the totality of the circumstances of the debtor’s financial situation demonstrates abuse.” In reality this comes down to lifestyle and the budget as set forth on Schedules I and J become the focus of attention.

Other Changes to the Bankruptcy Code Made by BAPCA in 2005:


Another change made by BAPCA was to change the waiting period between multiple filings under chapter 7 from six (6) years to eight (8) years. This time period is calculated from filing date to filing date.

Credit Counseling and Debtor Education Requirements:


In order to file a case under chapter 7 or chapter 13 a debtor must now complete, within 180 days of filing, an individual or group credit counseling class by a credit counseling agency approved by the United States trustee or bankruptcy administrator. This must be done before filing. BAPCA also requires, after filing, that a chapter 7 or chapter 13 debtor must complete an “instructional course concerning personal financial management. 11 U.S.C. 727(a)(11).


A 2007 General Accounting officer report was unable to say whether the credit counseling provisions are having any beneficial effect for debtors. It would seem that the requirements are merely an administrative hurdle to getting bankruptcy relief.  There is no mechanism for measuring how well the requirements are meeting any need Debtors may need. My personal opinion is that the information provided may be useful but that the situations that drive bankruptcy filings in my practice are such that credit counseling would not have helped prevent the filing. Do the courses help people after they file? There is no mechanism to measure this and my clients report that the information is long since forgotten after a filing. Credit counseling doesn’t help with job loss or medical problems that tend to drive filings.


Changes to the Automatic Stay Provisions in the Bankruptcy Code:

BAPCA provides that the automatic stay (the law which automatically ceases all collection activity against the debtor), is limited for people who have re-filed bankruptcy within certain time periods. 11 USC 362. The new section 362(c)(3) provides that if a debtor files a chapter 7, 11, or 13 case within one year of having a dismissal of an earlier case, the automatic stay terminates in the present case after 30 days. The solution is to file a Motion to Extend the automatic say in the present case. These are routinely granted as long as the filing is not abusive and is a legitimate bankruptcy filing prepared correctly.

If the present filing is a third (3rd) case filed within one year then the automatic stay does not go into effect at all unless the debtor files a motion to impose the stay and the debtor demonstrates that the filing is in good faith with respect the creditors being stayed by clear and convincing evidence. These provisions are added to the Code to prevent debtors from improperly using multiple filings to delay creditors in the situation where the debtor either does not qualify for bankruptcy or is filing the multiple cases while not intending to follow through with the case for whatever reason.

Stricter Notice Requirements

BAPCA protects creditors from violations of the automatic stay if the debtor did not give “effective” notice of the case pursuant to 11 U.S.C. 342(g). The notice provision requires debtors to give notice of the bankruptcy to the creditor at “an address filed by the creditor with the Court,” “or at an “address stated in two communications from the creditor within the 90 days of the filing of the bankruptcy case.” 11 U.S.C. 342(c)(2)(e) & (f).

Expansion of Luxury Goods and Cash Advance Exceptions to Discharge.

BAPCA expanded the presumption of fraud in the use of credit cards for larger charges made close to the date of filing. The amount that a debtor must charge for “luxury goods” to invoke the presumption is reduced from $1,225 to $500. The amount of cash advances that would give rise to the presumption of fraud was also reduced from $1,225 to $750. The time periods giving rise to these presumptions was increased from 60 days to 90 days. Therefore if a debtor purchases any single item for more than $500 within 90 days of filing on credit, the presumption is that the debt was incurred fraudulently. 11 U.S.C. 523(a)(2)( c).


Changes to Student Loan Discharge:


Section 523(a)(8) of the Bankruptcy Code was amended to change the types of educational loans that cannot be discharged absent “undue hardship.” There was a difference between private lenders and governmental lenders previously. Now, even loans from “for profit” or “non-governmental” lenders are non-dischargeable.


Changes to Exemption Laws- Forum Shopping Limited


BAPCA changed the exemption framework in the bankruptcy Code so that a debtor must wait 730 days (2 years) after moving to a new state, before using that state’s exemption law. This prevents debtors from moving around the country and taking advantage of unlimited homestead exemptions that exist in certain states. If you move to Colorado and file a bankruptcy within two years, then you use the exemption law of the state you previously lived in. (It is a bit more complex than that and sometimes you end up using the Federal Bankruptcy Exemptions circumstance). If you are considering bankruptcy DO NOT look online and make decisions about exemptions (what you will be allowed to keep). Go see a qualified bankruptcy lawyer in this circumstance.

Other Creditor Friendly Changes:


The new law allows creditors to repossess property (not homes) if the court has not taken action with respect to secured loans within 45 days of the filing. There are a number of ways to deal with this in Colorado and you will not lose your car by filing bankruptcy, with planning from a decent bankruptcy lawyer.  This applies mainly to debtor’s vehicles in Colorado, it does not apply to your home.


Summary:

If you’ve read this entire summary you may be thinking that bankruptcy is no longer worth it, or useful. This is far from the case. Talented lawyers exist who help consumers get largely the same relief they have always been entitled to from the Bankruptcy Code. For certain higher income debtors, the law does make a significant difference, but there are alternatives both inside and outside bankruptcy there as well. Stated differently, the law changed and it is harder and more complex to file in some cases, but bankruptcy is still useful and very available for those who need it.

Legislative History.

The BAPCA of 2005 is largely based on a law proposed in 1999. 1999 Bankruptcy Law . The credit card and banking lobby worked very hard over a long period of time to get this bill passed. The 1999 proposed law, was "like a vampire," it would not die despite efforts by debtors counsel lobby to kill it.