The Top Ten Changes to the Bankruptcy Code
Under The 2005 Bankruptcy Abuse and
Consumer Protection Act
Edgar Borrego
On October 17, 2005, the majority
of the provisions of the 2005
Bankruptcy Abuse and Consumer
Protection Act (BAPCA) went into effect.
Although this article attempts to explain
the most relevant changes to the
Bankruptcy Code, the most important
thing to know about the new Code is that
it still allows debtors who are suffering
financial hardship to file bankruptcy. In
other words, contrary to what some people
think, bankruptcy is not dead. This being
said, let’s proceed to the top ten changes to
the Code under BAPCA.
1. MEANS TEST: This is perhaps the
most significant change in the practice of
consumer bankruptcy. A debtor must
undergo the means test if the debtor’s current
monthly income is greater than the
median income for a family of the same
size in the debtor’s state. For example, in
Texas the median income for a family of
four is $59,369. Therefore, if the debtor’s
current monthly income multiplied times
twelve is greater than $59,369, then the
debtor must undergo the means test. In
order to conduct the means test, you must
first determine the debtor’s “current
monthly income.” This is calculated by
determining the debtor’s average monthly
income from all sources for the past six
months prior to filing, not including
income from Social Security. Once the
current monthly income is determined,
you subtract monthly expenses as specified
under the National and Local Standards
established by the IRS. You also subtract
other expenses such as health insurance,
expenses incurred to maintain the safety of
the debtor, and costs incurred to provide
care for an elderly, chronically ill or disabled
member of the debtor’s immediate
family. There are other expenses allowed;
however, listing all of them would exceed
the scope of this article. Once you subtract
the allowed expenses from the debtor’s
current monthly income, you get the
debtor’s net monthly income. If the
debtor’s net monthly income is $166.67 or
more, then there is a presumption that
Chapter 7 is an abuse and the debtor will
be denied a discharge. The presumption of
abuse may be rebutted by showing “special
circumstances.”
In my experience, very few debtors fail
the means test. I believe there are two reasons
for this. First, even under the old law,
a debtor who had good income but unreasonable
and excessive expenses would be
denied a Chapter 7. Thus, the means test
really does not change anything. Second,
the debtor may live in a poor community
where the median income is much less than
our state’s median income. Hence, the
means test would not apply to the majority
of the debtors in poor communities.
2. ELECTION OF EXEMPTIONS: You
must use the exemptions of the state you
have been domiciled in for the last two
years. This was designed to prevent “rich”
New Yorkers from moving to Texas or
Florida, purchasing an expensive home,
then filing for bankruptcy. When someone
files for bankruptcy, they may choose
either the exemptions provided for under
the bankruptcy or exemptions under state
law. In Texas, this basically means the
exemptions found in the Property Code.
Therefore, you must have lived in Texas
for at least two years in order to exempt
your homestead under Texas law. This new
section can lead to some strange scenarios.
For example, if someone moved from
Idaho to Texas 18 months ago and files for
bankruptcy here, we must use Idaho
exemptions. Of course, I do not know
Idaho exemptions nor am I licensed to
practice Idaho law, yet I must attempt to
advise my client under Idaho law.
3. TERMINATION OF AUTOMATIC
STAY FOR REPEAT FILERS: The automatic
stay terminates 30 days after filing if
the debtor has had a previous case pending
in the 12 months prior to filing. There
is no automatic stay if the debtor has had
two previous cases in the 12 months prior
to filing. A debtor is permitted to petition
the court to extend the automatic stay, but
this must be done within 30 days of filing
the petition. In order to continue the stay,
the debtor must demonstrate that the case
was filed in good faith as to the parties
being stayed.
4. LIMITATION ON CRAM-DOWN:
Under Chapter 13 law, a debtor must pay a
secured creditor the value of their collateral,
with interest. For example, if a debtor
owes $15,000 on a car, but the value is only
$13,500, the debtor must pay $13,500, with
interest, to the creditor. However, under
the new law, this may not be done for vehicles
purchased 910 days prior to the filing
of the petition. For other purchase money
security interests, it is one year prior to filing.
In our example, a debtor would have
to pay all $15,000, plus interest, to the car
lien holder if the car was purchased within
910 days prior to filing.
5. EASIER COLLECTION OF CHILD
SUPPORT: The automatic stay does not
prohibit child support creditors from collecting a domestic support obligation
(DSO) from property that is not property
of the estate, from withholding income of
the debtor for payment of a DSO, from
withholding or suspending a driver’s
license, from reporting overdue support to
a consumer reporting agency, from intercepting
a tax refund, or from enforcing a
medical obligation as specified under Title
IV of the Social Security Act. Further, a
debtor will not obtain discharge of a bankruptcy
if child support is not paid.
6. PRE-PETITION COUNSELING: An
individual may not be a debtor under the
Bankruptcy Code unless such individual
has, during the 180-day period preceding
the date of filing of the petition, received
from an approved nonprofit budget and
credit counseling agency, an individual or
group briefing that outlined the opportunities
available for credit counseling and
assisted such individual in performing a
related budget analysis. A list of approved
agencies is posed on the U.S. Trustee’s
website, www.usdoj.gov/ust/. This briefing
may be conducted in person, over the telephone
or via internet. Most of my clients
conduct it over the phone. The cost to
attend such counseling means there is less
money available for the creditors. There
have been rumors of this section being
repealed, but it currently remains in full
effect.
7. INCREASED TIME BETWEEN DISCHARGES:
A debtor may not be granted a
Chapter 7 discharge if (a) a discharge was
granted in a Chapter 7 case commenced
within eight years before the filing of the
petition, or (b) a discharge was granted in
a Chapter 13 case within six years before
the filing of the petition, unless the previous
Chapter 13 plan paid 100 percent of
the allowed unsecured claims or it paid 70
percent of such claims and the plan was
proposed in good faith and was the
debtor’s best effort.
A debtor may not be granted a Chapter
13 discharge if “the debtor has been granted
a discharge in a case filed under
Chapter 7 during the four year period preceding
the date of the order for relief.” I
find this section extremely confusing.
Does the four years start at the time the
petition for Chapter 7 was filed, or when
the discharge was granted? To date, Texas
case law has been split on this issue.
8. REAFFIRMATION: Under the new
law, there are new rules for reaffirming
debts that require disclosures similar to
those required by the Truth In Lending
Act. Debtor’s attorneys are required to certify
that the debtor was fully informed of
the reaffirmation terms, that the agreement
to reaffirm is purely voluntary and
the agreement does not impose an undue
hardship on the debtor or a dependent of
the debtor. Finally, the attorney must
advise the debtor of the consequences
should the debtor default under the terms
of the reaffirmation agreement.
9. INCREASED DOCUMENT GATHERING:
Perhaps the most burdensome
part of the new Bankruptcy Code is the
increase in the amount of document gathering
and document preparation. Among
other things, a debtor is now required to
provide to the trustee copies of all payment
advices received within 60 days
before the date of filing. However, the
debtor must provide to their attorney payment
advices for the six months prior to
filing. This is in order to calculate the
debtor’s current monthly income, remember?
The debtor must also file a statement
disclosing any anticipated increase in
income or expenses in the 12 month period
following the filing of the petition. A
copy of the debtor’s latest tax return must
be provided to the trustee, a copy of the
certificate from the approved credit counseling
agency discussed in No. 6 above
must be filed along with a copy of any
debt repayment plan, and the debtor must
file with the court a record of any interest
the debtor has in an Education IRA. The
debtor must also provide proof of insurance
to any automobile lien holder or
mortgage company. This is just the tip of
the iceberg; other documents are required
to be provided to the trustee and/or filed
in court after the bankruptcy petition is
filed.
10. A MORE RESTRICTED DISCHARGE:
Under the new Bankruptcy
Code, a debtor may no longer discharge a
student loan without showing undue
hardship, regardless if the loan was
insured or guaranteed by a governmental
unit. There is a presumption of nondischargeability
for debts owed to a single
creditor for luxury goods or services
obtained within 90 days of filing of the
petition, or for cash advances of more
than $750 obtained within 70 days prepetition.
A debtor cannot discharge a debt
for personal injury while operating a boat
while under the influence, nor can the
debtor discharge a debt obtained to pay a
nondischargeable tax owed to a governmental
unit. Also, the “superdischarge” for
debts in Chapter 13 have been severely
reduced. Finally, a debtor may not receive
a Chapter 13 discharge if the debtor is not
current on all post-petition domestic support
obligations.
Edgar Borrego is a partner in the El Paso
law firm of Tanzy & Borrego. He is certified
by the Texas Board of Legal Specialization
in Consumer Bankruptcy Law.
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