What Is the Bankruptcy Abuse Prevention and Consumer Protection Act?

On April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which instituted substantial changes to the Bankruptcy Code. Most provisions of BAPCPA became effective in October 2005. BAPCPA’s provisions make it more difficult to file for Chapter 7 and impose many additional requirements on debtors in an effort to exclude debtors who can pay their creditors from Chapter 7. Under the amendments, a bankruptcy case should be dismissed if the debtor is found to be “abusing” Chapter 7 relief. Prior to the BAPCPA, the word “substantially” was included immediately before “abuse” in the test.

Chapter 7 Means Test

One of the most significant aspects of the new bankruptcy laws is the means test for individuals with primarily consumer debts who wish to file for Chapter 7. Under the Bankruptcy Code, a consumer debt is “primarily for a personal, family, or household purpose.” If the debtor is above the threshold established by the means test, his or her Chapter 7 petition may be dismissed, or the case could be converted to a filing under Chapters 11 or 13, if the debtor consents.

If the debtor’s current monthly income is less than the state median, the debtor automatically qualifies for Chapter 7. If the debtor’s current monthly income is more than the state median income, the means test will be applied to determine if filing for Chapter 7 is presumptively abusive. This step is a bit tricky. If the debtor’s projected disposable income, which is monthly income minus certain allowable expenses, over the next five years is less than $6,000 ($100/month), you are eligible to file under Chapter 7. However, if the debtor’s current monthly income minus the allowable expenses and multiplied by 60 (the number of months for the next five years) is more than the lesser of (1) 25 percent of the debtor’s nonpriority unsecured claims in the case or $6,000, whichever is greater; or (2) $10,000, the court will presume that abuse exists. If this is the case, the debtor will not be allowed to file for Chapter 7 unless he or she can show special circumstances.

Other Requirements for The Debtor

BAPCPA includes a number of additional requirements for a debtor seeking to file under Chapter 7. An individual debtor is now required to obtain an individual or group briefing from an approved nonprofit budget and credit counseling agency within 180 days of filing for bankruptcy. This briefing must, at a minimum, outline opportunities for available credit counseling and assist the debtor in performing a budget analysis.

Another critical requirement is that prior to receiving a discharge, a Chapter 7 debtor must complete a personal financial management course. In addition, a debtor filing under either Chapter 7 or 13 must provide a copy of his or her most recent tax return to the trustee before the meeting of creditors. The debtor must also provide a copy to any creditor that requests one. Finally, before a debtor submits documents to the court or a trustee, the debtor and his or her attorney must make a “reasonable inquiry to verify that the information contained in such document is (1) well grounded in fact, and (2) warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law.”

Duties of The Trustee

There are also new, increased duties for the trustee. The trustee must now advise a domestic-support creditor in writing of the existence of and right to use support enforcement and collection agencies. The trustee must also provide notice of such claims to those agencies. If the debtor was serving as an administrator of an employee benefit plan at the time of filing, the trustee must perform the duties of an administrator. If a debtor is a health care business, the trustee must use “all reasonable and best efforts” to transfer that business’s patients to another such business in the same physical area that provides substantially similar services with a reasonable quality of care. Finally, a trustee in a Chapter 7 case must ensure that the final reports are uniform.

Although BAPCPA has made it more difficult for individuals with consumer debt to file for Chapter 7 bankruptcy, it is still possible, and the majority of debtors still qualify for Chapter 7 relief. An experienced bankruptcy attorney can determine whether you qualify for Chapter 7 and help you navigate the requirements for filing.

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