"Bankruptcy Reform" - Finally a reality! Let the suffering begin.

In November of 2002, I predicted on this site that the banking lobby would keep trying to ram through legislation that was "consumer-hostile". Sure enough, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) passed in April of 2005 and (in most respects) became effective on October 17, 2005. In my own oversimplified way, here are a few ways Bankruptcy "Reform" will impact the choices of people considering consumer bankruptcy (either Chapter 7 or Chapter 13):

To file a Chapter 7 ("Liquidation") bankruptcy, the Debtor must fill out a means test form. There are three ways to "pass" the means test for Chapter 7:
a) Your family's average income for the six months prior to filing is less than the median for a household of that size in your state; OR
b) If you don't pass under the first prong, your disposable income to pay unsecured creditors (using a confusing and convoluted formula) is less than $100 per month for the next five years; OR
c) If you don't pass under the first two prongs, your disposable income to pay unsecured creditors (using a confusing and convoluted formula) is between $100 and $166.66 per month for the next five years, BUT that won't pay at least 25% of your unsecured debt.

If you don't pass the means test and you file Chapter 7 anyway, there will be a presumption that the Bankruptcy is "fraudulent" or "abusive" and there is a strong chance that the case will be dismissed. Worse, the Court or the Bankruptcy Trustee may seek sanctions against the Debtor(s) and/or their lawyer. All so that the Debtor will be more inclined to file a Chapter 13 bankruptcy, thereby paying back some money to the unsecured creditors.

Of course eighty-five percent of Chapter 7 filers under the old law were below the median income (set by the IRS) or had primarily business debts (in which case the means test doesn't apply). Translation - the Means Test won't change things for most filers except that lawyers' fees will be higher. Why, you ask?

Lawyers are now required to vouch for their clients' accuracy. That's right, the lawyer must sign that after reasonable inquiry (i.e. independent investigation by the lawyer), they have no reason to believe that anything you have told the court is incorrect. So what "reasonable inquiry" does the lawyer have to do? We're not sure yet, but the prevailing wisdom is that we will have to pull your credit reports, do asset searches and similar things to confirm that you have been complete and truthful in what you tell us. That will take a lot more time and will cost more money (especially for asset searches) and that will mean that lawyers will have to charge more for both Chapter 7 and Chapter 13 which is no doubt what the banking lobby had in mind when it lobbied for passage of this bill.

There are many more ways that BAPCPA makes life intentionally harder for Bankruptcy filers and their lawyers; the ranting continues in the next column.

We are a Debt Relief Agency under 11 U.S.C. 101. We help people file for Bankruptcy under the Bankruptcy Code.

The material presented on the wbsite of Runes Law Offices, P.C. is intended for information purposes only; people who have specific legal problems or issues should rely on legal advice only if provided by an attorney after in-person consultation.

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