Bapcpa

After seven failed attempts and massive lobbying largely by banks and credit card companies, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was signed into law by President Bush on April 20th, 2005. The legislation represents the largest overhaul of the Bankruptcy Code since its enactment in 1978. The intent of Congress was to improve bankruptcy law and practice with a dominant theme of restoring personal responsibility and integrity in the bankruptcy system.

The BAPCPA is a comprehensive set of bankruptcy reforms that addresses several key factors, including escalating bankruptcy filings, significant creditor losses associated with bankruptcy, loopholes and incentives in the current system that allow for opportunistic personal filings and abuse and the lack of financial accountability. The Act also creates new responsibilities for those in charged with administering consumer bankruptcy and those who counsel debtors to achieve bankruptcy relief.

One of the most important provisions in the BAPCPA is the amendment to Bankruptcy Code Section 707(b), which provides for means testing. Prior to enactment of the BAPCPA, a case under Chapter 7 could only be dismissed for substantial abuse. Means testing is intended to prevent abuse by debtors, through the use of a much more objective standard. (1) According to the CCH Bankruptcy Reform Act Briefing, the means test is designed to "force those debtors who have the ability to pay some of their debts into Chapter 13 as opposed to liquidating under Chapter 7 and wiping the slate clean." Under this test, a debtor would remain eligible for Chapter 7 if his or her monthly net income, less allowed deductions, is less than $100 ($6,000 over five years). However, if a debtor's monthly net income exceeds $166.67 ($10,000 over five years) after allowed deductions; he or she will not be eligible for Chapter 7. (2)

Critics of the legislation say the provisions are one-sided in favor of the credit corporations and will likely punish those struggling to get out of debt the most. Those people would include the elderly; individuals affected by job loss, divorce, medical expenses and moderate to low-income struggling families. For these people, the new BAPCPA places a great burden on potential debtors to settle their debts instead of seeking a new start through bankruptcy. While the bill is intended to curtail bankruptcy abuse from debtors, many critics feel the law will force people seeking relief into a lifetime of second-class citizenship based on poor credit decisions. (3) Critics also point out the bill takes away the power for bankruptcy judges to decide what defines substantial abuse. and replaces their discretion with the new means test. Many who oppose the bill feel as though the BAPCPA is a one size fits all and does not encompass a number of other considerations. Consumer advocates claim that instead of making it more difficult for people to expunge debt, congress should focused more towards curbing the credit card companies in their quest of putting cards in every American wallet.

Supporters of the BAPCPA believe that credit rates will come down because the risk of default will now be lower. People who oppose this view feel a better approach to lowering credit risk would be to stop providing credit to the overextended. Regardless, one of the larger card issuers reported adding over 2 million new accounts in the last quarter of 2004 and an increase in profit of 9%. (4) One thing that seems clear is the BAPCPA imposes no new responsibility or reform on the credit card industry.

Another provision the BAPCPA has added to the bankruptcy code is mandatory credit counseling. This provision is something that the old bankruptcy laws did not require. Now, in order for a person to file Chapter 13 or 7, they must receive credit counseling from “an approved nonprofit budget and credit counseling agency”. (5) Also, the counseling must be completed within 180 days prior of the filing date. The new law gives little flexibility or exceptions to this requirement, which has caught many people trying to file off guard. The only people who do not have to meet this new requirement are those who can’t due to “incapacity, disability, or active military duty in a military combat zone”. (5)

The credit counseling mandate has raised a lot of criticism among attorneys, judges, and debtors trying to file. Statistics from the National Association of Consumer Bankruptcy Attorneys (NCABA) show the lack of the counseling effectiveness. According to the NCABA, out of the 61,335 consumers seen in February 2006 by approved credit counseling agencies, 97 percent were still unable to restructure their debt. (6) The counseling service is not free to a filing debtor. Most agencies charge $100 upfront for the counseling, which can be a difficult payment for a person who has exhausted