The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect on October 17, 2005. BAPCPA applies more stringent limits on bankruptcy options than ever before. The reforms of the act have a significant impact not only on large corporations, but on individuals who own small, unincorporated businesses, opening a new era in the history of bankruptcy law and practice.
Here are some of the major areas affected by BAPCPA:
- Credit counseling. This is one of the most drastic reforms in the act. It states that the debtor must consult with a court-approved nonprofit budget- and credit-counseling agency and participate in a financial education session, all within 180 days of the bankruptcy filing. Credit-counseling agencies are required to provide services regardless of the debtor’s ability to pay, either in person, by phone, or via the Internet. Agencies must help provide the debtor with a related budget analysis.
- Means test. The means test permits dismissal of the case if the debtor’s income exceeds the state median income (regardless of the amount of debt) or on general grounds, including bad faith on the part of the debtor, and is used to determine whether a debtor is eligible for Chapter 7 (liquidation) or must file under Chapter 13 (wage-earner repayment plan).
- Homestead exemption. A debtor is only permitted to exempt up to $125,000 of interest in a homestead that was acquired within the 1,215-day period prior to the filing. This calculation does not include any equity that has been rolled over during that period from one house to another within the same state, however.
- Time between bankruptcy filing. Debtors filing a Chapter 7 bankruptcy are ineligible for discharge if they have filed a Chapter 7 or Chapter 11 within the last eight years.
- Domestic support and student loan obligations. Domestic support gets first priority in distribution. Support owed to a former or current spouse or child has priority over those assigned or owed directly to a governmental entity. Student loans are not dischargeable, whether they are government or private agency loans.
- Production of additional documents. The act imposes new requirements on debtors. No less than seven days prior to the creditor’s meeting, Chapter 7 and Chapter 11 debtors must provide trustees and creditors with copies of their most recent federal income tax returns. On request of a judge or other interested party, debtors must also file copies of any federal income tax return with the court for a tax year ending while the bankruptcy case is pending, and for any tax year that ended during the three years before the case was filed. If the required tax information is not provided, the case will be dismissed.
- Automatic stay. If a bankruptcy is filed within one year of the dismissal of an earlier case, the automatic stay in the second case terminates 30 days after the filing.
- Household goods definition is limited. The act’s new definition limits the avoidance of non-purchase money security interest for electronic equipment to one radio, one television, one VCR, and one personal computer with related equipment. The new section also excludes jewelry worth more than $500 (with the exception of wedding rings), works of art not made by the debtor, and motor vehicles.
- Nondischargeability for fraud in the use of credit cards. In the past, a presumption of fraud was present when a debtor charged over $1,225 for luxury goods within 60 days of a bankruptcy filing. That amount has been changed to $500 and the time limit has been changed to 90 days. Credit card cash advances, which used to carry the same limitations as the purchase of luxury goods, now also have the tougher $500, 90-day limitation.
Bankruptcy filing requirements have become stricter and diminish the threat of a bankruptcy discharge for creditors who are collecting individual and/or business debts. If an individual or business owner owes money, there is, under this act, a bigger potential for the recovery of overdue accounts.