Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed by the 109th United States Congress on April 14, and signed into law by President George W. Bush on April 20, becoming Pulic Law 109-8. Most provisions take effect October 17, 2005. The Act of Congress makes it more difficult for consumers to erase debt by forcing more people to file under Chapter 13 bankruptcy rather than Chapter 7 bankruptcy.

Some of the more significant (and controversial) changes introduced to bankruptcy doctrine include:

  • Increasing the amount of paperwork which must be filed by every debtor, requiring Credit counseling and financial education for debtors whose debts are primarily consumer debts, and increasing attorney obligations in a manner that, collectively, will increase the cost of filing for bankruptcy significantly. On the other hand, filing fees can now be waived for indigent debtors. However, it should be noted that if there is no qualifying Credit counseling agency in a debtor's area, the bankruptcy trustee can waive this requirement.
  • Making it more difficult for individuals to receive a Chapter 7 discharge. A means test is to be imposed on would-be filers. Debtors whose income (based on the six month period prior to filing), is above the median income in the state (ranging from $72,451 in Massachusetts to $42,290 in West Virginia, as of 2005), and debtors whose debts are not primarily consumer debts are not subject to this test. This will affect roughly 20% of people who currently file under Chapter 7. Others debtors must make calculations of their net income after deducting priority debt payments, secured debt payments, IRS determined expense allowances and certain other expenses specified in the Act. If this net income is less than $100 per month, a Chapter 7 discharge (which does not involve a payment plan) is permitted. If the net income is $166.67 or more per month, the debtor cannot file under Chapter 7. If the net income is between those two figures, then a debtor may file under Chapter 7 only if he or she is incapable of paying at least 25% of his or her unsecured, nonpriority debt over sixty months based on this net income figure. This formula has the effect of rewarding debtors with many assets which are heavily mortgaged and debtors with larger amounts of unsecured debt. Since alimony and child support payments are "priority debts" it also has the effect of making it easier for people who owe back domestic support obligations (such as "deadbeat dads") to file under Chapter 7 than other debtors.
  • Making Chapter 13 far less attractive by, amongst other things, requiring five year payment plans (from a debtors income) rather than the three year plans that were previously the norm, for debtors who are not permitted to file under Chapter 7, greatly narrowing the "super discharge" (most notably for many non-penalty tax debts), narrowing the ability of debtors to "cram down" secured personal property (such a cars whose loans are less than two and a half years old, and other personal property whose loans are less than one year old)- under old law the debtor only had to pay an amount equal to the value of the property to retain it, under the new law the full payments on the covered property must be paid to retain it.
  • Allowing creditors to pursue collection remedies without court permission in various circumstances such as offsetting tax refunds, pursuing tax and domestic relations litigation in all respects except the final turnover of assets from the estate, establishing wage assignments in domestic relations actions, repossessing vehicles and personal property subject to loans or leases 45 days after the first meeting of creditors in cases where no court action has been taken regarding that property, and allowing evictions that completed the court process prior to the filing of the petition or involve endangerment to property or drug use to proceed.
  • Requiring that debtor counsel conducts an investigation of their clients' filings and be personally liable for them, not present under prior law. In addition, bankruptcy filings will now be subject to audit in a manner similar to tax returns.
  • Tightening the standards under which debts which could be discharged in bankruptcy are "reaffirmed" in light of abuses practices involving reaffirmation under the prior law.
  • Limiting state homestead exemptions to $125,000 in equity for homesteads owned for less than 1,215 days (3 years, 4 months). In some fact patterns, mostly patterns involving some fraud (constructive or overt), the homestead equity is always limited to $125,000 regardless of the length of ownership. These provisions were effective immediately upon the Act's signing.
  • Requring a 730 day waiting period before a debtor may use his state's exemptions. Where a debtor failed to live continously in one state for 730 days, the debtor must select the exemptions for the state where he lived the greatest part of the 180 days preceding the 730 day period before filing. Definitions of federal exempt property and the valuation rules for that property are also more precisely defined in a manner favorable to creditors compared to current law.
  • Making it easier for creditors who received preferential payments of less than $5,000 from the debtor before bankruptcy to avoid repaying such payments for the benefit of all creditors.
  • Increasing the bureaucratic compliance obligations in and shorting deadline for Chapter 11 reorganizations involving small businesses.
  • Improving the ability of the bankruptcy estate to reclaim assets placed in asset protection trusts within ten years of filing or paid as employment bonuses to insiders within two years prior to filing.
  • In less controversial provisions, the Act makes Chapter 12 bankruptcy (farm reorganization) permanent, overhauls the treatment of complex financial contracts including many derivative contracts used by hedge funds, and overhauls the treatment of ancillary foreign bankruptcy proceedings.

The legislation, sponsored (introduced) by the chairman of the Finance Committee, Republican Senator Chuck Grassley of Iowa, was supported by President George W. Bush. Tom DeLay also championed the controversial Act. Many Democrats and the Green Party opposed of the law have noted that the credit card industry spent millions of dollars lobbying in support of the act. Opponents of the bill also argued that it makes the government "a bill collector for private companies", and could lead to criminal prosecutions over matters best left in civil courts, and theoretically even to life imprisonment under federal three-strikes laws.[1] A defendant who claimed he could not pay his $2.5M debt to his wife was indefinitely imprisoned by a Pennsylvania court. This decision was upheld by the United States Court of Appeals, which included now Supreme Court nominee Judge Samuel A. Alito Jr. on a three-judge panel. Alito wrote for the unanimous decision there is "no federal constitutional bar to Mr. Chadwick's indefinite confinement,"[2] Although the original legislation was introduced during the Clinton Administration, and had more bi-partisan Congressional support at the time, the president vetoed it nonetheless. The bill languished for years due to disagreements in Congress as to the level of the means test, and whether anti-abortion groups could use bankruptcy to discharge fines levied against them by courts for actions that resulted in property damage or injury such as bombing abortion clinics.[3]

Hurricane Katrina Bankruptcies

Although the devastation inflicted by Hurricane Katrina and the inadequate government response to the disaster is expected to cause further economic misery for the poor residents of New Orleans and other affected areas, Jim Sensenbrenner, Republican chairman of the House Judiciary Committee, refused to allow victims of the hurricane to enjoy any exception to the recent Bankruptcy Reform, a recent bill passed with widespread support of the banking industry that aims to make it more difficult for consumers to declare bankruptcy. "If someone in Katrina is down and out, and has no possibility of being able to repay 40 percent or more of their debts, then the new bankruptcy law doesn't apply," Sensenbrenner said [4].

The Justice Department's trustee program has since said it would relax the strict Chapter 7 rules for diaster victims, including those affected by Hurricane Katrina. The Justice Department trustees oversee the bankruptcy courts, and have discretion in ruling over bankruptcy filings. They also said the trustees would not challenge debtors who couldn't meet paperwork requirements because documents were destroyed by the hurricane, and that victims of Hurricane Katrina may skip the credit counseling requirement before filing.

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