The Bankruptcy Abuse Prevention and Consumer Protection of 2005 otherwise known as ‘the new bankruptcy law’ was signed into law by President George W. Bush Jr. It was supposedly meant to curb abuse of the bankruptcy system. The credit card industry spent over $100 million lobbying for the new law. They claimed that interest rates would go down for everyone. In fact, while the credit card companies did save a lot of money they simultaneously increased interest rates and their profits increased dramatically.
New law new changes
Presumption of abuse
The new made law several significant changes to the bankruptcy statute. First and most importantly it created a ‘presumption of abuse’. Meaning the onus was on the debtor to prove that they weren’t abusing the system.
The new law provides two definitions of “abuse”. “Abuse” may be found when there is an “presumption of abuse” arising under a BAPCPA-created “means test”, [see], or through a finding of bad faith, determined by a totality of the circumstances
The ‘means test‘ basically a test to determine whether or not the debtor truly cannot repay his debts. The first step is to check if the debtor’s income is above the median income of their state. If it is then they have to go through an additional process to see if they qualify for a chapter 7 discharge. Even if the debtor passes the means test the new law the petition can still be thrown out or converted to a chapter 13.
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 only the court or the 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 the creditor(s) interest may seek dismissal or conversion of the case for “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”
Longer wait between filings
Under the old law a debtor could file for bankruptcy every 6 years the new law changed that to 8 years.
Credit counseling now mandatory within 180 days of filing for chapter 7 bankruptcy
A 2007 GAO report was inconclusive regarding the efficacy of the counseling provisions and concluded that there is no mechanism in place to evaluate it
…the value of the counseling requirement is not clear. The counseling was intended to help consumers make informed choices about bankruptcy and its alternatives. Yet anecdotal evidence suggests that by the time most clients receive the counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy. As a result, the requirement may often serve more as an administrative obstacle than as a timely presentation of meaningful options. Because no mechanism currently exists to track the outcomes of the counseling, policymakers and program managers are unable to fully assess how well the requirement is serving its intended purpose.
More Protections for Creditors
The new bankruptcy law also provided more protections to creditors because it expanded the exceptions to discharge. The presumption of fraud in the use of credit cards was expanded. The amount that the 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 a presumption of fraud has also been reduced, from $1,225 to $750. The time period was increased from 60 days to 90 days.
That means if a debtor purchases anything over $500 within 90 days of filing, The creditor can challenge the debt as fraudulent that is that the debtor never intended to pay the money back.
Stricter lien avoidance guidelines
Some types of liens may be avoided through a chapter 7 bankruptcy case. However, the new law limited the ability of debtors to avoid liens through bankruptcy.
The definition of “household goods” was changed — for example, by limiting “electronic equipment” to one radio, one television, one VCR, and one personal computer with related equipment.
The definition now excludes certain items such as works of art not created by the debtor or a relative of the debtor, jewelry worth more than $500, with adjustment for inflation (except wedding rings), and motor vehicles.
Limits to forum shopping
The new bankruptcy law changed the rules on claiming exemptions. Exemptions define the amount of property debtors may protect from liquidation to pay creditors.
A debtor who has moved from one state to another within two years of filing (730 days) the bankruptcy case must use exemptions from the place of the debtor’s home for the majority of the 180-day time period.
The new bankruptcy law just makes it harder and more expensive for a consumer to file for bankruptcy by:
Increasing the amount of paperwork needed
Increasing the cost of hiring an attorney since they must not investigate your assets
Allowed creditors to go after more assets like a tax refund without a court’s permission