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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 “BAPCPA” (bankruptcy reform) was enacted on April 20, 2005 by congress after anecdotal testimony by powerful credit card lobbies about imagined bankruptcy abuses. This legislation was the biggest reform to the bankruptcy laws since 1978. It became effective on October 17, 2005. A big misperception was and continues to be that the new law abolished bankruptcy. It did not. We did not return to the days of debtor’s prison. What the Act did was make the filing process a little harder and it imposed a test, the “means test” to determine what type of bankruptcy a debtor may file.
Many consumers think if they fail this test, they cannot file at all. They can, just not under the rules known as Chapter 7. This is the filing status presumed to be the most abused since it discharges a debtor from most of their obligations. BAPCPA was designed to discourage Chapter 7 filings in favor of Chapter 13 filings, which is perceived to provide more relief to creditors.
The test’ determines whether a filer has the means — income or assets — to work out a repayment plan with creditors. If they do not, they may proceed with a request to file under Chapter 7, otherwise they need to file under Chapter 13. It is not a straightforward calculation, which is why you should consult a knowledgeable attorney to help you understand your options—and that you still have options.
The sensationalized stories of abuse which were used by the credit card industry to justify BAPCPA to congress related to a very tiny fraction of the total bankruptcies filed. Despite stories designed to convince congress that bankruptcy is a lifestyle choice overspending consumers use to absolve themselves of debt obligations so they can begin anew overspending.
“So where did their money go? It went to basics. The real increases in family spending are for the items that make a family middle class and keep them safe (housing, health insurance), that educate their children (pre-school and college), and that let them earn a living (transportation, childcare, and taxes)…… In other words, today’s family has no margin for error. There is no leeway to cut back if one earner’s hours are cut or if the other gets sick. There is no room in the budget if someone needs to take off work to care for a sick child or an elderly parent. Their basic situation is far riskier than that of their parents a generation earlier. The modern American family is walking a high wire without a net.” Elizabeth Warren, The Middle Class on the Precipice, “ Harvard Magazine (January-February, 2006), available at www.harvardmagazine.com/on-line/010682.html.
The vast majority of people who need to file bankruptcy must do so after a catastrophic event like a divorce, job loss or medical issue sends them scrambling to pay bills. People in financial trouble often think their ship is about to come in — they accept offers of credit to tide them over assuming they will have a new job soon or the divorce will be settled quickly or the insurance company will reconsider and pay the hospital bill. When the ship does not materialize, they are too far in debt to get out.