In 2005, Congress enacted a major overhaul to bankruptcy law. The resulting amendments, called BAPCPA or the Bankruptcy Abuse and Consumer Protection Act, made it harder for some people to qualify for Chapter 7 bankruptcy and imposed other changes and requirements. Below we discuss three of the changes that have had the biggest effect on Chapter 7 and Chapter 13 bankruptcy filers.
The Means Test
Probably the most notable change brought about by BAPCPA was the creation of the means test, which has made some debtors with higher incomes ineligible for a Chapter 7 bankruptcy. Generally, if the debtor’s “current monthly income” is below the state median income for a family the same size as the debtor’s, the debtor will still be able to file a Chapter 7 petition. However, if the debtor has a current monthly income above the state median, then debtor will be subject to the "means test."
Purpose Behind the Means Test
The purpose of the means test is to determine whether the debtor has sufficient “disposable monthly income” to be able to make debt payments through a Chapter 13 plan. If the debtor can make substantial payments to a Chapter 13 plan, the law presumes that the debtor should be ineligible for a Chapter 7 liquidation.
How the Means Test Works
In the simplest of terms, the means test takes the debtor’s current monthly income, subtracts certain allowed expenses and required debt payments, and then calculates the debtor’s "disposable income."
Under the current standards, in order to be eligible for a Chapter 7 bankruptcy, a debtor must have less than $166.66 per month in disposable income. If the debtor has $100 or more in monthly disposable income, then the debtor would also have to have at least $24,000 in unsecured debt to be eligible for a Chapter 7, and if the debtor has $150 per month in disposable income the debtor would need to have at least $36,000 in unsecured debt to be eligible for a Chapter 7 liquidation.
If the debtor is not eligible for Chapter 7 bankruptcy under the means test, the debtor may file for Chapter 13 bankruptcy instead.
Learn more about The Means Test and Eligibility for Chapter 7 Bankruptcy.
Mandatory Credit Counseling and Personal Financial Management Course
In order to be eligible for bankruptcy relief, bankruptcy law now requires debtors to receive credit counseling and budget analysis from a nonprofit, approved credit counseling agency prior to filing for bankruptcy. The debtor must complete the initial credit counseling within 180 days prior to filing for bankruptcy—there are only a few limited circumstances where this requirement will be waived or extended. You can get the counseling over the telephone or Internet.
Also, in order to get the bankruptcy discharge, the debtor must complete a personal financial management course before the end of the bankruptcy case.
A list of approved counseling agencies is available at: www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm.
Requirement to Reaffirm, Redeem, or Surrender
Though there remains some debate on the issue, it appears that BAPCPA ended the option of “ride through” of secured debts as it existed prior to the 2005 amendments. In ride through, a Chapter 7 debtor could opt to retain secured property, simply keep current on payments, and then still discharge the unsecured portion of the associated debt. The Bankruptcy Code now requires that the debtor reaffirm, redeem, or surrender the collateral within 30 days after the 341 meeting.
While many courts have not yet ruled on the question, others courts have explicitly stated that the debtor may no longer declare an intention to ride through with respect to an item of property; instead, the debtor must declare an intent to reaffirm the debt, redeem the collateral, or surrender the collateral and then take the appropriate next steps in line with the declared intent. These courts have held that if the debtor fails to declare an intent to do one of these three options, or fails to take the appropriate next steps specified by the code, then the property in question ceases to be part of the bankruptcy estate and the creditor may take any action against that property as if the bankruptcy had not been filed.
There is one possible exception to this prohibition against ride through. A few courts have held that if the debtor declares an intention to reaffirm the debt and takes the required additional next steps, but the creditor will not agree to the reaffirmation or the court will not approve the reaffirmation, then the debtor may still ride through with respect to that item of property. See In re Moustafi (Bankr. D. Ariz. 2007); In re Husain (Bankr. E.D. Va. 2007).
Learn more about Your Debts in a Chapter 7 Bankruptcy.
