How Does 2005 Bankruptcy Reform Law Affect Me?

Sun, Jul 1, 2012

Financial Advice

In 2005, the U.S. Congress passed, and President Bush signed, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This law was pushed through by banks and credit card companies, so you can probably guess that it makes it far more difficult for some consumers to file for bankruptcy.

The law almost exclusively affects Chapter 7 bankruptcy. Stepping back for a moment, Chapter 7 bankruptcy involves discharging one’s debts (removing the legal obligation to pay them), in exchange for liquidating (selling) some of their property in order to pay at least a small portion of the debt.

The other common form of consumer bankruptcy is known as “Chapter 13,” and it restructures a person’s debt into a single, manageable monthly payment. If the consumer consistently makes these payments for 5 years, their debt is discharged, no matter how much they ended up paying through the payment plan. This typically results in more of a consumer’s debt being paid off than with Chapter 7, so it’s usually favored by creditors. This law pushes many people who would ordinarily file for Chapter 7 bankruptcy over to Chapter 13.

Here are some of the restrictions on filing for Chapter 7 bankruptcy that the 2005 law imposed.

1. The Means Test: Prior to the enactment of the BAPCPA, debtors, regardless of their income level, could file for Chapter 7 bankruptcy. Now, if a debtor’s income exceeds the median income of their state of residence, this triggers what’s known as a “presumption of abuse,” and the debtor has to affirmatively prove that they are not abusing the bankruptcy system in order to rebut that presumption.

2. Waiting periods between filings: Nobody is allowed to file for bankruptcy more than once within an 8 year period.

3. Credit counseling: The new bankruptcy law also requires that debtors attend two credit counseling courses, from authorized providers. They must attend one before they file, and one after filing. This requirement has come under considerable scrutiny, and is thought by many to be ineffective in helping people avoid bankruptcy, and instead puts an additional bureaucratic hurdle in front of debtors hoping to declare bankruptcy.

4. Changes to exemptions: Chapter 7 bankruptcy requires that debtors liquidate their property to pay off some of their debt. However, it allows debtors to claim some property as “exempt,” up to a certain dollar amount. For example, if the law provides a $5,000 exemption for cars, and the debtor owns a car that’s only worth $4,000, the debtor can claim their car as exempt, and they are allowed to keep the car. There are many categories of exemptions, with different dollar amounts assigned to them. These rules are set by state law. To avoid “forum shopping” (the practice of filing bankruptcy in a state with a more favorable exemption rules), if a debtor has moved from one state to another less than two years before filing bankruptcy, they are required to use the exemption rules from their previous state of residence.

5. More types of debt are non-dischargeable: Some types of debts cannot be discharged in bankruptcy, including most taxes, child and spousal support, and civil damage awards arising from an incident involving drunk driving. The 2005 law adds most student loans to this category, even if they originated from a private, for-profit entity. This has very serious implications for people who go to college on borrowed money, and then find themselves unable to get a decent-paying job.

6. Increased debt repayment in Chapter 13: The new law affects Chapter 13 bankruptcy as well, though not as much as it affects Chapter 7. It made several relatively small changes to Chapter 13 that effectively require debtors to pay back more of their debt than they did before.

7. Increased liability for attorneys:
Attorneys who assist their clients in preparing a bankruptcy petition can now be held personally liable for any misrepresentations made in the petition.

These are just some of the changes that this 2005 law made to the bankruptcy system, with almost every one of them meant to make filing for bankruptcy more difficult. However, for some people, filing for Chapter 7 bankruptcy might still be a good option to get out from under a mountain of crushing debt.

If you aren’t sure if bankruptcy is a good option for you, you should ask an experienced bankruptcy attorney or financial adviser. They can tell you if bankruptcy is the right option for you.

John Richards is a writer for and the Law Blog. The above article is for general informational purposes only, and should not be construed in any way as legal advice relevant to your particular situation. The only person qualified to give you legal advice is an attorney licensed to practice in your jurisdiction, who has been apprised of all the relevant facts of your situation.

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One Response to “How Does 2005 Bankruptcy Reform Law Affect Me?”

  1. Lindsay Lee Says:

    he Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a major reform of the bankruptcy system, was passed by Congress and signed into law by President Bush in April 2005. Bankruptcy was reformed in a number of ways, including tighter eligibility requirements. The majority of changes instituted by this new law took effect on October 17, 2005 (180 days after the law was signed), although a few changes took effect immediately after the legislation was signed by the President.


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