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Looking Back on Ten Years of “Bankruptcy Reform”

By White House photographer Paul Morse [Public domain], via Wikimedia Commons2015 marks the 10-year anniversary of the comprehensive law known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, Pub. L. 109-8, 119 Stat. 23. Supporters of the bill claimed that it would streamline the bankruptcy process and cut costs for everyone involved, but analyses of the law’s impact have suggested that creditors received most (or all) of the benefits. Some studies have suggested that BAPCPA has actually caused debtors’ costs to go up. Now that 10 years have passed, let us take a look at the bill and a handful of the changes it brought.

Passage of the Bill

Much of the support for BAPCPA came, unsurprisingly, from creditors. These are often the parties that bear the greatest loss when a bankruptcy court grants a discharge of debt, so they sought changes to the Bankruptcy Code that would ease this burden.

Opponents of the bill covered a wide spectrum, but a major point of contention was the assumption of widespread bankruptcy fraud. It was not clear to many that fraud was occurring at a rate that merited such a radical overhaul. Regardless of the opposition, however, the bill passed both houses of Congress—74 to 25 in the Senate, and 302 to 126 in the House of Representatives. President George W. Bush signed it into law on April 20, 2005.

The bill took full effect on October 17, 2005. According to remarks by the U.S. Trustee’s Office in 2006, the bankruptcy courts received more than 600,000 petitions in the two weeks prior to October 17, as people rushed to file under the old law. One year after the law took effect, new petitions were being filed at about 40 percent of the rate before BAPCPA took effect.

Chapter 7 Means Test

One of BAPCPA’s most well-known changes is the Chapter 7 “means test.” In order to qualify to file a Chapter 7 petition, a debtor must compare their monthly income to a same-size household’s median income in the debtor’s state. If their income is less than the median, they pass the means test. If it is greater than the median, they might not fail the means test, but it requires some very complicated calculations. Pub. L. 109-8 § 101(a), 119 Stat. 27; 11 U.S.C. § 707(b)(2).

Chapter 13 Income Calculations

BAPCPA also affected Chapter 13 debtors by changing the method for determining “reasonably necessary” expenses. Pub. L. 109-8 § 102(h), 119 Stat. 33-34; 11 U.S.C. § 1325(b). The law requires courts to base reasonable expenses on standards determined by the government, rather than an individual debtor’s particular circumstances.

Eligibility for Homestead Exemptions

Debtors may elect to choose a homestead exemption based on state or federal law. Prior to BAPCPA, a debtor had to have been domiciled in a state for at least 180 days to claim an exemption. The new law more than quadrupled this to 730 days. Pub. L. 109-8 § 307, 119 Stat. 81; 11 U.S.C. § 522(b)(3).

Counseling and Education Requirements

BAPCPA added a requirement that anyone intending to file for bankruptcy complete a “credit counseling” course from an approved provider no more than 180 days before filing a petition. Pub. L. 109-8 § 106, 119 Stat. 37; 11 U.S.C. § 109(h).

Private Student Loans

Another infamous change made by BAPCPA affected the nondischargeability of student loans. Prior to BAPCPA, only loans backed by the government were excepted from discharge. The new law expanded the exception, making private student loans nondischargeable as well. Pub. L. 109-8 § 220, 119 Stat. 59; 11 U.S.C. § 523(a)(8).

Since 1997, bankruptcy attorney Devin Sawdayi has represented Los Angeles individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. Contact us online or at (310) 475-939 today to schedule a free and confidential consultation with a member of our team.

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Photo credit: By White House photographer Paul Morse [Public domain], via Wikimedia Commons.