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Bankruptcy Reform Act
by Contributing Writer
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Overview
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was the most significant revision to the U.S. Bankruptcy Code in almost 30 years. During that time, creditors believe debtors came to see bankruptcy as simply another financial strategy rather than as an embarrassing last resort. Congress enacted the law with the express purpose of reducing bankruptcy filings. Most of the act's changes apply to bankruptcies filed after Oct. 17, 2005.
Bankruptcy Reform Act
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The Means Test
Individuals generally prefer to file for bankruptcy under Chapter 7 because it eliminates more debts than Chapter 13. But under the Reform Act, debtors must first pass a court-supervised "means test," which compares their income to state median income. If the debtor's income is below the state median, he may file Chapter 7. But if the debtor earns a certain level above the median income, the court will dismiss the Chapter 7 filing. The debtor may then try to reorganize under Chapter 13. You can find a means test calculator in the Resources section below.
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Serial Filings
Under the Reform Act, an individual may only file a Chapter 7 bankruptcy once every eight years and must wait at least three years after filing a Chapter 7 bankruptcy before filing a Chapter 13. Individuals and business may only file a Chapter 13 once every two years.
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Credit Counseling and Income Statements
Debtors must attend or prove they made a good-faith effort to attend credit counseling at least 180 days before they file for bankruptcy. You can find a link to a list of credit counseling programs approved by the U.S. Trustee in the Resources section below. In addition, debtors must file with the court, among other records, an approved repayment plan, paycheck stubs, annual statements and itemized listings of income and expenses, federal tax returns and a list of all education savings and tuition programs.
Bankruptcy Reform Act
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Retirement Accounts
The act protects qualified retirement accounts and contributions to such accounts from creditors. But debtors must still repay loans from retirement funds.
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Homestead Exemptions
Debtors must live in the state where they file bankruptcy for at least 730 days before claiming a homestead exemption. They may only claim up to $125,000 under the exemption if they bought a residence within 40 months of filing for bankruptcy.
Bankruptcy Reform Act
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Other Nondischargeable Debts
More debts cannot be discharged under the 2005 act, including debts incurred through fraud, tax liabilities due to failure to pay, domestic support obligations, student loans, homeowner and condominium association fees, luxury purchases of more than $500 within 60 days of filing and cash advances of more than $750 within 70 days of filing. Creditors may now reclaim inventory shipped within 45 days of the bankruptcy filing.
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Cross-Border Bankruptcies
The act creates Chapter 15 of the Bankruptcy Code, based on the United Nations' Cross-Border Insolvency Model Law, to address international bankruptcies.
