Bankruptcy Abuse Prevention and Consumer Protection Act

On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect, dramatically changing the bankruptcy process from what it had been in the past. Some of these changes include:

Mandatory Credit Counseling: Effective October 17, 2005, most debtors desiring to file bankruptcy must now complete a credit counseling class. This class must be completed within 180 days prior to the filing of the bankruptcy. Credit counseling agencies that administer these classes must be government approved. Classes can be taken in person, over the Internet or, in some cases, over the telephone, and are available in English and Spanish.

Means Test Eligibility: There are new eligibility requirements for debtors desiring to file under Chapter 7 Bankruptcy. Eligibility is determined by completing the “Means Test,” which determines if your monthly income is less than the median income in your state. Under the old law, if you filed for Chapter 13, the court determined what you can afford to pay based on what you and the court deem to be reasonable and necessary expenses. Under the new law, the court will apply living standards derived by the IRS to determine what is reasonable to pay for rent, food and other expenses to figure out how much you have available to pay your debts. See “Qualifications & Means Test.”

Proof of Income: Debtors must provide the court with copies of their pay stubs for the previous six months and a copy of their last filed tax return. Failure to file these documents will cause the case to be dismissed.

Subsequent Chapter 7 Filings: An individual who has filed and obtained a previous Chapter 7 discharge must wait eight (8) years to file another Chapter 7.

Tougher Homestead Exemptions: Under the old law, when you declared bankruptcy, the amount of your home equity that was protected from creditors was determined by the state where you filed. In Florida, for instance, your home would have been entirely exempt, even if you bought it soon before filing. The Bankruptcy Abuse Prevent and Consumer Protection Act, however, is more stringent about the Homestead Exemption. For instance, if filers haven’t lived in a state for at least two years, they may only take the state exemption of the state where they lived for the majority of the time for the 180 days before the two-year period. And if their home was acquired less than 40 months before filing or if the filer has violated securities laws or been found guilty of certain criminal conduct, filers may only exempt up to $125,000, regardless of a state’s exemption allowance.

Reduced “Automatic Stay” Protection: People who file for bankruptcy have been entitled to certain immediate protection from creditors, stopping collection efforts and lawsuits. This protection is called the “automatic stay” effect of a bankruptcy filing. Under the new bankruptcy law which took effect in October 2005, some of these protections have been eliminated. For example, filing for bankruptcy no longer delays or stops eviction actions, driver’s license suspensions, legal actions for child support, or divorce proceedings.

Lawyer Liability: Under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, if information about a client’s case is found to be inaccurate, the bankruptcy attorney may be subject to various fees and fines. This change required bankruptcy attorneys to dramatically increase their fees, many 75% to 100%. As a result, more and more people are now filing bankruptcy through non-attorney Bankruptcy Petition Preparers, savings thousands of dollars in legal costs.

Priority for Unpaid Child Support and Alimony: Under the new bankruptcy law, among the changes in creditor priority is that people who are owed unpaid child support and alimony take priority over any other creditor.

Redemption of Collateral on Secured Loans: Redemption of vehicles and other secured collateral is now limited to “replacement value.” Replacement value is defined as what a retail merchant would charge for the used collateral.

Mandatory Financial Management Education: Before any debt can be discharged, bankruptcy debtors must participate in a government-approved financial management education program. Classes can be taken in person, over the Internet or, in some cases, over the telephone, and are available in English and Spanish.