On April 20, 2005, after many years of lobbying by the credit card companies, President George W. Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Among the arguments for passing the bill was that credit card abuse had become rampant, and with the relative ease in which consumers could file for bankruptcy, filings had steadily increased throughout the 1990s.
Another factor compelling the federal government to address the bankruptcy law was the impact the influx of bankruptcy filings was starting to have on the economy. Lenders that couldn't recover debt inevitably passed it on to the consumer in the form of higher prices for goods and services.
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The law changed in 2005, making guidelines and requirements more stringent for filing bankruptcy. After the bill went into effect on October 17, 2005, those who chose to file were subject to a "means test" and were also screened to see if they were eligible to file for Chapter 7 bankruptcy instead.
Some of the main differences between Chapters 7 and Chapter 13 bankruptcy:
Chapter 7
• Mainly for those unable to pay their debts.
• Qualified assets worth more than a certain amount are sold and the money given to creditors.
• Remaining debts are cancelled.
• If the filer has no qualifying or redeemable assets, the creditors get nothing and essentially the filer gets a "fresh start."
Chapter 13
• The filer agrees to a payment plan (usually around 3-5 years) to pay off at least part of their debt.
• Debts not included in the payment plan do not have to be paid.
• After the payment plan is complete, the filer is typically allowed to keep remaining property and assets. Balances on unsecured debts are discharged as well.
The means test mainly consists of two inquiries determining whether an applicant is eligible for bankruptcy:
1. A formula gauging the filer's ability to pay a percentage of their debt under their current financial situation.
2. An assessment comparing the filer's income to the median income level of their state. If the filer's income is less than the state median, they might be eligible to file for Chapter 7 bankruptcy. Income levels above the state median indicate the filer might be able to pay some or all debt via payment plan, making them potentially eligible for Chapter 13 bankruptcy.
One of the intentions of the revised bankruptcy code is to push people toward Chapter 13 who would have qualified for Chapter 7 before 2005 under the old law. This allows lenders to recover at least a portion of the consumer's debt.
All Bankruptcy applicants must also now take a brief credit counseling course from a government-approved organization within 180 days before filing. Bankruptcy lawyers cannot file bankruptcy for their clients until all of the prerequisites under the BAPCPA are met.
Because the new laws have made filing for bankruptcy more difficult, prospective applicants should find a lawyer that will give them step-by-step guidance in order to stay organized throughout this sometimes confusing process. At Mark Godbey & Associates, our attorneys are experienced with the new bankruptcy laws. We will guide you through the process of gathering all necessary documents and information, and help you complete all paperwork properly so that your bankruptcy gets approved. We offer a FREE initial consultation to determine if you are eligible to file and whether it is a Chapter 7 or 13. To schedule some time to meet with us, call 513-241-6650.
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