Jonathan Frutkin Bankruptcy Law Blog on Lawyers.com

In October of 2005, President George W. Bush signed into law one of the most sweeping reforms of the bankruptcy system in American history. Known as the Bankruptcy Abuse Prevention and Consumer Protection Act, this legislation sought to prevent people and businesses from abusing bankruptcy as a means for discharging their debt. Now, debtors wishing to file for bankruptcy face stricter requirements and a more thorough filing process.

The key aspects of the bill focus on individuals in debt. Prior to its passing, the bill’s proponents argued that debtors were essentially using Chapter 7 bankruptcy—which eliminates all debts after the forfeiture of assets—to wipe away massive accumulated debt from credit cards and other loans. According to the advocates of bankruptcy reform, debtors were behaving irresponsibly and with impunity while creditors remained uncompensated and everybody else suffered higher interest rates. Unsurprisingly, the credit card industry, banks, and retailers supported the Bankruptcy Abuse Prevention and Consumer Protection Act.

Specifically, for individuals, the bankruptcy law enacted in 2005 contains three major changes related to eligibility and process requirements:

• Chapter 7 “means test”: under the new bankruptcy law, individuals wishing to file for Chapter 7 bankruptcy must pass a “means test” based on their personal income in relation to the median income of their state. If your income is below the median income in your state, you can file for Chapter 7; if your income is above the median income, then a formula considering your total debt, expenses, and recent income will be used to determine your ability to pay $100 each month. Those who can pay $100 are precluded from Chapter 7 and must proceed to Chapter 13 bankruptcy, which entails a five-year repayment plan.
• Credit counseling and debtor education requirement: under the new bankruptcy law, people filing for Chapter 7 or Chapter 13 must undergo credit counseling and debtor education services approved by the U.S. Trustee Program. The purpose of this requirement is to educate debtors about bankruptcy options and alternatives and to teach them how to manage their personal finances more responsibly.
• Automatic stay exemptions: traditionally, bankruptcy permitted people to avoid or delay action from creditors; the new bankruptcy law no longer protects debtors from evictions, driver’s license suspensions, and measures related to divorce.

If you are experiencing financial strain and are considering bankruptcy, the new bankruptcy law may change the type of bankruptcy which you can file and the process. For more detailed information, you should contact an experienced bankruptcy lawyer.