How Will the New Bankruptcy Law Affect Me?

On October 17, 2005, the misnamed “Bankruptcy Abuse Prevention and Consumer Protection Act” (BAPCPA) went into effect. It is misnamed because it will do little to prevent bankruptcy abuse, while being the most anti-consumer law passed in the last 25 years. As Bankruptcy Judge Frank Monroe put it in a recent case, “the legislation’s adoption in its title of the words “consumer protection” the “grossest of misnomers.” The new law does not prevent bankruptcy (see Top 15 Myths About the New Bankruptcy Law.) It does, however, make a number of changes in how people file and the procedures during their cases.

BAPCPA was over 500 pages long. Many of its changes matter only to academicians, or will have little effect on most consumers who file. Below are a number of the main changes that will impact consumer debtors. (A detailed analysis of all the consumer changes may be found here.)

Credit Counseling. Before an individual can file for Chapter 7 or 13, he or she must complete a Credit Counseling course. Not to worry—the course usually lasts for 45–90 minutes, and can be taken by telephone or over the internet from a U.S. Trustee-approved counselor. For our recommendations for counselors, read our Credit Counseling page. The course must be taken within 180 days of filing, and costs about $50.

You must also take a Credit Education course before you can receive your discharge.

Means Test. If your Current Monthly Income—as determined by a formula that may have little to do with your actual current monthly income, expenses or debt, but does include aspects of your income, expenses, and debt—is less than the median income in your state, you can file for bankruptcy under Chapter 7. In Maryland, the median income for a household of one is $50,509, for a household of 3, $78,211, and for a household of 6, $105,102.

If your Current Monthly Income is more than the median income in your state, and your Disposable Income—again, determined by a formula—is over $100 per month, you may have difficulties in filing a Chapter 7 case and will have to file a Chapter 13 case.

Social Security income is not included as part of Current Monthly Income.

Tax Returns and Proof of Income. Under BAPCPA, you must provide the Trustee or the Court with copies of your federal tax returns from the last tax year they were filed. You may be required to file returns for previous years if you have not done so. You must also provide copies of “pay advances”—usually paystubs—for the 60 days before your case was filed.

Fewer “Automatic Stay” Protections. Once you file for bankruptcy, the Automatic Stay provides immediate protection from creditors and others, including most debt collection and lawsuit actions. Under BAPCPA, some of these protections have been limited or eliminated. For example, filing for bankruptcy no longer delays or stops eviction actions, driver’s license suspensions, legal actions for child support, or divorce proceedings.

New Priority for Unpaid Domestic Support Obligations. Under BAPCPA, Domestic Support Obligations (usually alimony, child support and property distribution) are given priority over almost every other creditor.

Homestead Restrictions. BAPCPA affects homeowners with more than $125,000 in equity who live in the District of Columbia, California, Texas and Florida. These states have had unlimited homestead exemptions, meaning that, regardless of how much equity you had in your house, creditors and bankruptcy trustees could not touch it. This has now been changed. Homestead exemptions are now capped at $125,000, unless you have lived in that state at least 40 months. If you have lived in that state for more than 40 months, your state’s homestead exemption amount applies, even if it’s higher than $125,000. Maryland homeowners are unaffected, since Maryland has no homestead exemption.

Cramdowns. Under the old law, in a Chapter 13 case you could “cram down” loans. This meant that you would only have to pay the value of an item, instead of the (often higher) loan amount. Typically used for cars, BAPCPA prohibits cram downs on car loans where the car was purchased for consumer purposes within 910 days before your case was filed.

Refiling Restrictions. You may receive only one Chapter 7 discharge every 8 years, up from the 6 years pre-BAPCPA. You are still allowed to file a “Chapter 20,” that is a Chapter 7 followed by a Chapter 13. Chapter 20 cases can be useful where you have a lot of unsecured Debt and are behind on your mortgage or car payments.

Reaffirmations. It may be necessary for you to Reaffirm your car, depending on which state you live in, even if your payments are current. This is a fast-developing area of the law, and it is currently quite unclear (and may depend on which state you live in.)

If you find yourself in a real bind, or need further information, call us. We are experienced in all aspects of collections and bankruptcy. We can help you restructure your finances, schedule workout arrangements and, if necessary, advise and represent you in bankruptcy.

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