The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 altered the relationship of debtors and creditors, and even altered the relationships between creditors.

Debtors are generally losers under this major revision of the Bankruptcy Code (initially adopted in 1978, and only minimally changed over the past 27 years, until the passage of BAPCPA), while creditors are generally the winners. However, to paraphrase George Orwell's book, "Animal Farm", not all creditors were "equal" winners under the new law. Some creditors were "more equal" than others. This article will review some of the major revisions in debtor-creditor relationships under BAPCPA.

General changes to bankruptcy law under BAPCPA

BAPCPA was a 5 year effort initiated by the credit card industry to make changes to the Bankruptcy Code at a time when the country's economy was generally improving, but the numbers of individuals filing bankruptcy were surging higher every year. There was a perception by creditors that bankruptcy was too "easy" and individuals who could pay creditors some or all of their obligations were permitted to file bankruptcy to eliminate their debt. The initial focus of BAPCPA was on individual debtors, rather than business debtors. As a result, Congress formed a Bankruptcy Review Commission to travel the country and conduct hearings to learn about the problems with the current bankruptcy system, and propose solutions.

The Commission presented its findings to Congress, suggesting some modest modifications to the Bankruptcy Code, but otherwise proposing the current system remain intact. Judge Edith Jones of Texas, a member of the Commission, presented a minority report to the Commission's findings. Her report, together with the efforts of the credit card industry, which financed the creation of proposed bankruptcy reform legislation by a former staffer of a Florida congressman, resulted in an earlier version of BAPCPA. The BAPCPA bill completely disregarded the findings of the Bankruptcy Review Commission, and adopted the minority report's suggestions for "fixing" bankruptcy.

This earlier version of BAPCPA was not immediately enacted - it took 5 tortuous years before the legislation ended up on President Bush's desk and was approved in April 2005 (although the new law's effective date was October 17, 2005). During the delay, bankruptcy scholars, lawyers, and Judges all spoke in opposition to the legislation. Nonetheless, in large part due to the significant campaign contributions received by members of Congress, the legislation passed in early 2005.

Most of the changes were intended to affect individuals (as contrasted with businesses) filing bankruptcy. These changes affected individuals filing either Chapter 7 (liquidation), or Chapter 13 (individual reorganization with unsecured debt below $336,900), or Chapter 11 (individual reorganization without any unsecured debt limitation). Although Chapter 11 is most frequently thought of as a business reorganization chapter, it is also available to individuals who have more debt than is allowed in Chapter 13. The underlying purpose of the legislation was to require more individuals to file either 13 or 11 instead of permitting them to file a 7.

The means by which the legislation accomplished its purpose was to first require each individual filing bankruptcy (any chapter) to undergo "credit counseling", and receive a certificate demonstrating that step was met. Next, each individual would be segregated into those with "below median income" from those with "above median income". The Census Bureau, which keeps these statistics, sets forth the median income for each state, varying by numbers of people in each household.

Below median income households could choose to file either a 7 or a 13 without further analysis of that household's monthly expenditures. Above median income households would need to complete a "means test" which reduced their monthly income by IRS approved expenditures. At the end of the means test, if an above median income household had more than $166/mo of excess income over his/ her/ their expenses, that household would be required to file a Chapter 13 (or 11) bankruptcy if that household wanted to take advantage of the Bankruptcy Code to address their debt problems.

Notice that my description of the bankruptcy filer changed from the word "debtor" to the word "household". The reason for that change is that in filing bankruptcy, a person must divulge the income of all of the members of the household (including the teenager mowing lawns in the summer, or the aging parents living with the debtor). To provide proof of all of the income coming into the household, the debtor must provide all of the "pay advices" received by the household during the previous 6 months before filing, along with the last year's tax return, to help the U.S. Trustee's office determine whether the debtor is accurately demonstrating his/her/their income status.

Assuming the debtor is found to be properly filing bankruptcy (and using the right Chapter), the only way the debtor can successfully complete the process is to take a "personal financial management course" before receiving his or her bankruptcy discharge. In bankruptcy, the discharge is the entire game. A bankruptcy "discharge" is a court order which prevents a variety of debts from ever being enforced against a debtor. Many debtors think of the discharge as "wiping out" or eliminating the debt, (which is a misnomer, but close enough for our purposes). Filing bankruptcy without receiving a discharge is usually a tremendous waste of money and time.

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Creditor benefits under BAPCPA

During the bankruptcy process, most creditors received some benefit under the new law. Credit card companies are now given the ability to claim credit card fraud against debtors for smaller sums of money. Mortgagees have more tools to prevent debtors from filing successive bankruptcy petitions when trying to save their homes from foreclosure through limitations to the effectiveness of the automatic stay upon more than one bankruptcy petition being filed in a 12 month time period. Divorce support obligations are raised to a higher payment priority under the revised law, placing them just after bankruptcy trustees fees in payment priority whenever a trustee finds assets to distribute to creditors, and have been given extensive new notice provisions whenever a debtor owing support filed bankruptcy. Automobile lenders have received the most benefits - their new car loans can not be "crammed down" to the value of the car (as allowed under the old law) if the car was bought 910 days prior to the bankruptcy filing. Municipal creditors also received some significant benefits - municipalities may lien and collect their real and personal property taxes (both pre-petition and post-petition) more effectively against any property of the estate, without the possibility of being relegated to a lower priority level as under the old law.

In short, BAPCPA reduced the flexibility the bankruptcy courts had previously enjoyed in fashioning reorganization payment plans for individuals, or in analyzing whether debtors were choosing the appropriate bankruptcy chapter when they filed. The law reflected a sentiment that the bankruptcy court system, its lawyers, and bankruptcy scholars we too deeply entrenched in an old system which did not expect enough from debtors. Some sponsors of the legislation stated that there was nothing wrong with individuals being expected to be, in essence, indentured servants to the credit card industry for 5 years. There was an impression by the legislation's sponsors that financial morality was lacking in individual bankruptcy. As an aside, it is difficult to understand Congress' moral outrage for individual financial distress at a time when Congress is constantly adding staggering sums to this country's national debt, only to require those sums to be paid by our children.

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