Bankruptcy Law:  Bankrutpcy Reform of 2005 Still Relevant

Bankruptcy Reform

The credit industry has consistently lobbied hard for legislation wanting to make it much more difficult, if not impracticable, for debtors to file bankruptcy.  The credit industry is obviously motivated by their short-term financial goals of wanting to increase profits by collecting a higher percentage of their debt.

Bankruptcy attorneys, and most consumer rights groups, almost uniformly oppose reform legislation.   Likewise forward thinking economists typically oppose reform legislation as well.   The two compelling reasons for allowing debtors access to bankruptcy are taxes and retirement planning.   If debtors are denied bankruptcy protection, then they will suffer wage garnishments and attachments driving them to stop working, or working under the table.  In both of these cases, they stop becoming contributors to the tax base, thus spreading the burden on the rest of the tax payers.

Besides not contributing to the tax basis, debtors that are financially strapped are not able to start saving for retirement.   If Debtors are not able to save for retirement, they are required to rely on government resources during their senior years, further straining our government.   Bankruptcy attorneys argue that bankruptcy allows debtors the opportunity to obtain a clean slate, and thus encouraging them to return to work and pay taxes, as well as save for retirement.

bankruptcy reformBankruptcy Abuse Provisions and Consumer Protection Act of 2005

After much debate, lobbing and many significant changes, Congress approved the Bankruptcy Abuse and Prevention and Consumer Protection Act of 2005 (BAPCPA), and it was signed into law by President George W. Bush.

Bankruptcy attorneys suggest that the very name of the 2005 reform act is misleading as it suggests somehow that it was correcting abuse and protecting consumers.    There was no evidence that bankruptcy laws were being abused by more than a tiny percentage of people, and we had quality judges and trustees equipped with authority to combat any abuse.  Furthermore, virtually nothing about the statute was designed for consumer protection; it was designed for creditor protection.

Fortunately, the legislation was watered down as it moved through the House and Senate, with only a few significant changes being made to the law.

Our bankruptcy attorneys believe that the most significant of these changes was the implementation of a more objective test to determine debtors’ disposable income.   This provision is referred to as the Means Test and is applied to individual debtors whose household income average is more than the median income for the state in which they reside.    There are several exceptions to the Means Test; the most significant one is for debtors with more than 50% of their debt being business related, as opposed to personal debt.

In addition to the Means Test, individual debtors are now required to participate in a pre-bankruptcy credit counseling session.     The theoretical objective of this requirement is to protect consumers from aggressive bankruptcy attorneys by presenting them with non-bankruptcy options.

Once a bankruptcy has been filed, individual debtors are now also required to take a financial management class prior to receiving a discharge.  Of all changes resulting from the BAPCPA of 2005, this is probably the change that most bankruptcy attorneys support.

In addition to the requirements above, there were many other small changes such as stricter notice requirements to creditors, a longer waiting period between Chapter 7 discharges, some limitations on homestead exemptions, and some changes to the dischargeablity laws.

If you have any questions about bankruptcy reform or how the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 may apply to you, please do not hesitate to contact one of our bankruptcy attorneys.

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