Bankruptcy Reform Encourages Divorce

25 Oct Bankruptcy Reform Encourages Divorce

The “family-friendly” Congress elected in 2004 did an odd thing in 2005 when they passed BAPCPA, the bankruptcy “reform” law. In the process of ignoring how the American family has evolved since “Father Knows Best” was a television mainstay, they encouraged the break-up of the indebted family.

The Eighth Circuit Bankruptcy Appellate Panel, in effect, reached the same conclusion in 2010.

In this case, a couple were separated and maintaining two separate households. They had separate income and expenses. And each household, by itself, would be considered “below-median” under the means test. That would make that individual more likely to qualify for Chapter 7 relief. In this case, the spouses chose to file Chapter 13 instead.

But Chapter 13’s means test has a nasty sting in it because Congress seemingly could not imagine anything except the standard family unit of 2 parents, 2.5 children and a dog. But for the non-standard family — Both spouses’ incomes must be counted to determine whether the debtor — either spouse on their own or filing jointly — is above or below-median income. This implicates the complexity of the means test analysis but, more importantly, it forces the debtor to propose a 5-year plan. If they were treated as separate, below-median income households, they could propose as little as a 3-year plan.

So because the couple in this case chose to remain marred, their incomes were counted together which made them “above median.” Thus, they were forced to propose a longer payment plan.

I have written about this marriage punishment before in more detail. Nevertheless, it is still a little shocking to see it in action.

If and when Congress sees fit to revisit the massive error know as BAPCPA, one would hope that it will consider how families live today. Not relying on anachronistic views of how they wish families were still ordered.

The case in In re Harman, #10-6025 (8th BAP 9/3/10).


Photo Credit: Kai Schreiber

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
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