The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ( BAPCPA ) (Pub.L. 109-8, 119 Stat. 23, enacted April 20, 2005), was a law enacting several significant changes to the U.S. Bankruptcy Code. It was passed by the 109th United States Congress on April 14, 2005 and signed into law by President George W. Bush on April 20, 2005. Most provisions of the act apply to cases filed on or after October 17, 2005. Referred to colloquially as the "New Bankruptcy Law", the Act of Congress attempts to, among other things, make it more difficult for some consumers to file bankruptcy under Chapter 7; some of these consumers may instead utilize Chapter 13. Voting record of S. 256 .
Provisions
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) 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". 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 discharged only after the debtor has repaid some portion of these debts. 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.
Some of the bill's more significant provisions include the following:
Presumption of abuse
Prior to the BAPCPA Amendments, debtors of all incomes could file for bankruptcy under Chapter 7. BAPCPA restricted the number of debtors that could declare Chapter 7 bankruptcy. The act sets out a method to calculate a debtor's income, and compares this amount to the median income of the debtor's state. If the debtor's income is above the median income amount of the debtor's state, the debtor is subject to a "means test."
The most noteworthy change brought by the 2005 BAPCPA amendments occurred within 11 U.S.C. § 707(b) . Congress amended this section of the Bankruptcy Code to provide for the dismissal or conversion of a Chapter 7 case upon a finding of “abuse” by an individual debtor (or married couple) with “primarily consumer debt.” The pre-BAPCPA language of § 707(b) provided for dismissal of a chapter 7 case upon a finding of “substantial abuse.” Under the former § 707(b), only the court or the United States trustee could bring a motion to find abuse under the section. The 2005 amendments removed these restrictions.
Post-BAPCPA, § 707(b) provides two definitions of "abuse." “Abuse” may be found when there is an unrebutted “presumption of abuse” arising under a BAPCPA-created “means test,” , or through a finding of bad faith, determined by a totality of the circumstances .
Means test
Only debtors whose monthly income is higher than the median income of their state, as calculated by the Code, are subject to being found abusive under § 707(b)(2). Debtors whose income falls below the median income figure may be in violation of the means test, however no party is permitted to file a motion in order to find abuse under § 707(b)(2), . This creates a means test "safe harbor" for debtors below the state's median income figure.
Current monthly income is defined in 11 U.S.C. § 101(10A) as the monthly average of the income received by the debtor (and the debtor’s spouse in a joint case) during a defined six-month time period prior to the filing of the bankruptcy case. Some narrow classes of payments, for example, social security, are excluded from these figures. Notably, the average income may be higher or lower than the debtor's actual income at the time of filing for bankruptcy. This has led some commentators to refer to the bankruptcy code’s “current monthly income” as “presumed income.” It should be noted that if the debtor's debt is not primarily consumer debt, then the means test is inapplicable.
The applicable median income figure is adjusted by family size. Generally, the larger the family, the greater the applicable median income figure and the more money the debtor must earn before a presumption of abuse arises. A chart of the most recent applicable median incomes by state can be found at the US Trustee’s website.
This code section then requires a comparison between the debtor’s “current monthly income” and the median income for the debtor’s state. If the debtor’s income exceeds the median income, then the debtor must apply the means test.
For debtors subject to the means test, the test is calculated as follows. The debtor's “current monthly income” is reduced by a set of allowed deductions specified by the IRS. These deductions are not necessarily the actual expenses the debtor incurs on a monthly basis. Some commentators have referred to these deductions as “presumed expenses.”
The deductions applicable in 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 provided by the Internal Revenue Standards including “reasonably necessary health insurance, disability insurance, and health savings account expenses,”
- expenses for protection from family violence,
- continued contributions to care of nondependent 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 that the expenses are reasonable and necessary,
- additional home energy costs in addition to those laid out in the IRS guidelines that are reasonable and necessary,
- 1/60th of all secured debt that will become due in the five years after the filing of the bankruptcy case,
- 1/60th of all priority debt, and
- continued contributions to tax-exempt charities.
An itemized list of the applicable IRS living standards can be found at the US Trustee’s website.
A “presumption of abuse” will arise if: (1) the debtor has at least $166.67 in current monthly income available after the allowed deductions (this equals $10,000 over five years) regardless of the amount of debt, or (2) the debtor has at least $100 of such income ($6,000 over five years) and this sum would be enough to pay general unsecured creditors more than 25% over five years. For example, if a debtor had exactly $100 of “current monthly income” left after deductions and owed less than $24,000 in general unsecured debt, then the presumption of abuse would arise, .
If a presumption of abuse is found under the means test, it may only be rebutted in the case of "special circumstances", .
Nonpresumed abuse
Even in cases where there is no presumption of abuse, it is still possible for a Chapter 7 case to be dismissed or converted. If the debtor's "current monthly income" is below the median income, as discussed above, only the court or the United States trustee (or bankruptcy administrator) can seek dismissal or conversion of the debtor's case. If the debtor's "current monthly income" is above the median income, as discussed above, any party in interest may seek dismissal or conversion of the case. The grounds for dismissal under 11 U.S.C. § 707(b)(3) are the filing of a petition in “bad faith,” or when “the totality of the circumstances (including whether the debtor seeks to reject a personal services contract and the financial need for such rejection as sought by the debtor) of the debtor’s financial situation demonstrates abuse.”
Waiting period between filings
Another change that resulted from the BAPCPA was an extension of the time between multiple bankruptcy filings. 11 U.S.C. § 727(a)(8) was amended to provide that the debtor would be denied a discharge if a debtor had received a discharge in a prior Chapter 7 case filed within eight (8) years of the filing of the present case. Prior to BAPCPA, the rule was six (6) years between chapter 7 filings. BAPCPA did not change the rule for the waiting period if the debtor filed a chapter 13 previously.
Credit counseling
Credit counseling and debtor education requirements: Another major change to the law enacted by BAPCPA deals with eligibility. Section 109(h) provides that a debtor will no longer be eligible to file under either chapter 7 or chapter 13 unless within 180 days prior to filing the debtor received an "individual or group briefing" from a nonprofit budget and credit counseling agency approved by the United States trustee or bankruptcy administrator.
The new legislation also requires that all individual debtors in either chapter 7 or chapter 13 complete an "instructional course concerning personal financial management." If a chapter 7 debtor does not complete the course, it constitutes grounds for denial of discharge pursuant to new 11 U.S.C. § 727(a)(11) . The financial management program is experimental and the effectiveness of the program is to be studied for 18 months. Theoretically, if the educational courses prove to be ineffective, the requirement may disappear.
In 2006 more than half of all certified pre-filing counseling sessions were rendered by the three largest agencies: Money Management International, Consumer Credit C
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