For those of us who were practicing law at the time, the month of October, 2005 is very memorable. It was October 17, 2005 that the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect - the most sweeping change in bankruptcy law since the Bankruptcy Reform Act of 1978.
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)
BAPCPA (as it’s called) was actually passed by Congress and signed into law by President George W. Bush in April, 2005. However, since there are cases pending at all times in the world of bankruptcy, Congress provided for a six-month delay in the effective date of the law. So while all of us practicing bankruptcy law knew about the law change, we had a six-month time period to prepare for the changes the law provided.
And people with debt problems also had six months to think about whether they should file a bankruptcy case before the new law took effect, since the analysis of the law, at that time, was that the process of filing bankruptcy would become more time-consuming and expensive, and some of the flexibility debtors had previously enjoyed regarding their choice of bankruptcy chapter would be eliminated. The result of this six month wait period? A flood of bankruptcy cases being filed ahead of the October 17th effective date of BAPCPA.
So now, in October, 2017, the question is, what has been the effect of BAPCPA on filing bankruptcy for the person thinking about taking that step now? Have there been significant changes in the practical application of bankruptcy law? That’s what I will write about this week. Let’s take a look at what changed.
The Means Test
One of the centerpieces of BAPCPA was the requirement that all debtors whose debts were primarily consumer debts complete a “means test” to see whether they could “qualify” to file a chapter 7 bankruptcy or whether they would have to do a chapter 13 case. Referring to this as the means test is a little misleading.
The first step is to determine whether a debtor’s household income is above or below the median income for a household of similar size in the state in which the debtor resides. It is only if the household income is above median that the means test - a series of deductions from income to determine whether or not the debtor has significant enough expenses that the debtor lacks sufficient disposable income with which to fund a hypothetical chapter 13 plan. If the debtor’s income, after application of the means test, is above the line, then the debtor must file a chapter 13 bankruptcy case - eliminating the option of filing a chapter 7 case.
The means test has implications for debtors planning to file a chapter 13 case in the first place. If the debtor’s income is above-median, then the debtor must propose a payment plan for the maximum amount of time allowed in the bankruptcy code - 60 months. At the time Congress passed BAPCPA, it appears that Congress believed that the calculation of disposable income in the means test would control the monthly payment of the chapter 13 debtor. This has never really happened, since in the first few months after the new law went into effect, bankruptcy courts found that the chapter 13 debtor’s previous income and expense figures were irrelevant; the critical piece of a chapter 13 plan was future income.
Congress also built in loopholes to the requirement of completion of the means test. First, social security income (and arguably, unemployment compensation) is not considered as income. Also, a disable veteran whose debt was incurred while on active duty does not have to complete the means test. And most importantly, I think, people with a majority of debt that is classified as “non-consumer”, such as business debt or taxes, are not required to complete the means test in order to file a chapter 7 bankruptcy case. By carving out these exceptions to the means test requirement, Congress was able to insure that individuals on fixed or retirement income, small business people and (some) disabled veterans still have a chapter 7 option, even if they have relatively high incomes.
There is no question that means testing has limited the options of debtors, and in some cases resulted in a debtor waiting to file a chapter 7 bankruptcy case until the last six months’ of gross income realigns to a number below-median (think construction worker at the end of the construction season). But for the most part, the means test has simply been an objective measure for a trend in law that was taking place in the years running up to 2005: that individuals with significant disposable income should be in a chapter 13 payment plan - and for high income individuals, the payment plan should be for the maximum five years.
The End of Chapter 20
One of the big changes of BAPCPA was to attempt to eliminate the practice of “Chapter 20” cases. There was no Chapter 20 in the “old” bankruptcy law. Rather, chapter 20 refers to the practice of a debtor filing a chapter 7 bankruptcy case to discharge all of the debtor’s unsecured debt, and then, shortly after receiving a chapter 7 discharge, filing a chapter 13 case to pay the “stubborn” debts that aren’t discharged in a chapter 7, such as tax and child support obligations. By filing a chapter 7 case first, the chapter 20 debtor could maximize the dollars being paid in a chapter 13, and thus, theoretically at least, reduce the amount of money that would have to be spent to fund the chapter 13 plan.
Congress did this by creating a time period that had to pass between the filing of a chapter 7 case that resulted in a discharge, and filing a chapter 13 case that would be eligible for a discharge. Congress requires that there be at least four years from the date the chapter 7 case was filed for a chapter 13 case to qualify for a discharge. There is some confusion as to whether Congress intended the wait period to be marked from the date of filing instead of the later date of discharge, but the courts that looked at the language of BAPCPA read the statute as starting the “clock” from the moment the earlier bankruptcy case is filed.
Congress probably missed the mark if its intention was to eliminate chapter 20's, since the subsequent chapter 13 filing was designed, in most cases, to simply take care of “problem” debt - the kind of debt that a chapter 13 requires to be paid in full, in any case. And people who seek bankruptcy relief within eight years of a previous chapter 7 (that’s the time period between 7's) will still file chapter 13 to give them protection. Congress didn’t prohibit filing chapter 13 cases with the implementation of time periods in BAPCPA - it simply eliminated the possibility of a chapter 13 discharge.
Next week I’ll take a look at the impact of some other notable changes.