Bankruptcy Abuse Prevention
- President Bill Clinton was presented a bankruptcy reform bill in 2000 from the Republican-led Congress. Though the bill passed both houses, the president simply refused to sign it and the bill expired -- a practice known as a pocket veto. Five years later, after the re-election of George W. Bush, Congress again passed a bankruptcy reform bill and this time it was signed into law on April 20, 2005. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA, created additional hurdles for those seeking liquidation bankruptcy under Chapter 7.
- The major obstacle to qualifying for Chapter 7 bankruptcy today is the means test. Only those debtors whose current monthly income is below the median income level in their state now qualify for Chapter 7. The current median income is determined by averaging all income over the previous six months and subtracting certain necessary expenses from standards provided by the U.S. Trustee's office. If a debtor does not qualify under the means test, he might still be eligible for Chapter 7 if his debt is so large that his income (less allowed expenses) cannot pay a quarter of the debt over five years.
- Another requirement instituted by BAPCPA was the credit counseling requirement. A debtor cannot file for bankruptcy now without having received credit counseling from an approved counselor within 180 days of filing. A list of approved counselor's is available from the U.S. Trustee Program's website (see Resources). While some approved credit counselors work free of charge, many charge fees for their services, which largely consists of determining Chapter 7 eligibility and providing debt management recommendations. For Chapter 13 debtors, the credit counselors help devise a tentative repayment plan.
- Another change under BAPCPA was the effect of a bankruptcy filing on the automatic stay, which is the automatic freezing of any debt collection proceedings against a debtor once she successfully files for bankruptcy. Under BAPCPA, a debtor who has a bankruptcy dismissed and then refiles within one year has a stay period of only 30 days unless it can be shown that the refiling is in good faith and not an abuse of the stay procedure. BAPCPA also expanded the period after debt is discharged in Chapter 7 before a new Chapter 7 discharge can be obtained from six to up to eight years, and made it easier for creditors to have certain kinds of debt exempted from discharge.
