Part II – Changes in Bankruptcy Law
[See related articles on this blog: The Bankruptcy Abuse Prevention & Consumer
Protection Act (BAPCPA), “Part I, Rationales” &Part III The “Means Test in Bankruptcy”]
The enactment of the Bankruptcy Abuse Prevention & Consumer Protection Act (BAPCPA) in April, 2005, wrought significant changes in the law embodied in Chapter 7 of the United States Bankruptcy Code.
Changes were also affected in Chapter 13 of the code, but such changes in that section were not as broad or as impactful as those in Chapter 7. Whatever changes were seen in Chapter 13 were a direct result from those embodied in Chapter 7, the latter being the primary target of such bankruptcy “reform”.
The U.S. Bankruptcy Law – A Short History:
The first ever bankruptcy bill was introduced in Congress in 1798, largely a result of land speculators over-extending themselves in the purchase of large tracts of land in the South. Without bankruptcy laws, people with large amounts of debt were jailed without having to settle their debts. That first bill was based largely on the bankruptcy laws of England.
The bill wasn’t passed until February, 1800 – it was repealed less than three years later.
In the mid-1800’s, a financial panic ensued over much of the United States which was still in its “infancy”. This financial panic came about because of a multitude of factors, including land speculation issues and practices (again), debts held by state governments, lax or near-non-existent credit policies, failure of banks, and crop failures. As a reaction to such panic and depression, Congress passed a subsequent bankruptcy law in 1840 (the Bankruptcy Act of 1840).
Like the previous law, the 1840 enactment was repealed within three years of its passage.
The Bankruptcy Act of 1867 was enacted, again because of financial panic and depression that came after the end of the Civil War. People in the U.S. – both creditors and debtors alike – took an immediate dislike of this third attempt at enacting and maintaining a viable bankruptcy law and system.
For debtors, many felt that the law made them out to be “victims”; for the creditors, their gripes and dissatisfaction centered on possible abuse in bankruptcy by “irresponsible” debtors. That latter “rationale” would be used repeatedly over the years by proponents of strict bankruptcy laws and reform. Not surprisingly, the Bankruptcy Act of 1867 was itself repealed in 1878.
Twenty years later, a fourth Bankruptcy law (the “Torrey Bill”, named after the representative from Missouri who introduced it in Congress) was passed in 1898 – this was the Bankruptcy Act of 1898, an act that was never repealed like the others that had come before. The Torrey Bill was a more debtor-friendly enactment that gave companies protections from creditors (thus, a “capitalist” reason to support such an enactment?).
While the 1898 laws were amended several times over the ensuing decades, it survived intact for a period of 80 years until it was replaced by “reform” legislation in the Bankruptcy Act of 1978. The 1978 enactments were a serious attempt to update outdated notions of bankruptcy law and practice, with many new provisions, including the establishment of the Bankruptcy Code, included in the act.
There were two highlights of the enactment that stood out at the time. First, the law gave new and broader powers to bankruptcy judges – the role of the bankruptcy judges changed to a large degree because of the new law. Second, Chapter 11 and Chapter 13 were added to the bankruptcy code – Chapter 11 made it easier for companies and corporations to reorganize; Chapter 13 made it easier for individuals to file for bankruptcy (while affording some greater protections to creditors).
At the time, opponents of the 1978 law viewed it as being “debtor-friendly” in that, for one reason, it made it easier for debtors to file for bankruptcy – those in opposition feared (as it turned out to be, rightly so) that there would be a significant increase in bankruptcy filings and bankruptcy rates upon passage.Twenty-five years after passage of the 1978 act, the current iteration of our bankruptcy laws went into effect with the passage of the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005.
Prior to the passage of the BAPCPA in 2005, Congress made a prior attempt to tighten the bankruptcy laws to “prevent fraud and abuse”. In 2001, both houses of Congress passed an amendment to the 1978 act and sent it to President George Bush (#43) for his signature. The President deemed the bill to be “inequitable” and sent it back to Congress without making it law – the Congress, at the time, did not attempt to persuade the President to reconsider. Instead, Congress turned its attention to working on new, more “equitable” legislation that would not offend the Chief Executive. Those efforts resulted in passage of the BAPCPA.
The BAPCPA was Passed with Bi-Partisan Support in Congress:
In Congress, the House version of the 2005 bankruptcy reform law passed with wide bi-partisan support – there were 302 “yea” votes to 126 “nay” votes in the lower chamber. One of the main purposes of the bankruptcy “reform” legislation was “…to steer individuals towards filing Chapter 13 bankruptcy cases instead of Chapter 7 bankruptcy cases”.
In 2004 – 2005, Congressmen from both parties favored reform. One Democrat Congressman offered his support of the new law “…because it preserves the bankruptcy laws for people who truly need help and at the same time makes certain that those who can make payments towards their debt are held responsible.” Another Republican Congressman supported the bill, “…because it will crack down on fraud and abuse found in bankruptcy filings and will make both fraud and abuse tougher…”.
Changes in Bankruptcy Law with Adoption of the BAPCPA:
The following is a short, yet comprehensive summary of the changes that were enacted with the passage of the BAPCPA:
- Mandatory Credit Counseling: Beginning on October 17, 2005, most applicants for Chapter 7 bankruptcy protection were required to enroll in a mandatory “credit counseling” program approved by the federal government. The pre-filing counseling program is overseen by the Office of the U.S. Trustee program. The program must be completed within 180 days prior to filing for bankruptcy. The program also requires a debt management educational course that is an additional prerequisite to filing a Chapter 7 petition. Specifically, the credit counseling portion must be completed before filing; the mandatory debt management education must take place after filing but before debts can be discharged in bankruptcy.
Pre-bankruptcy counseling must comply with the following requirements: a thorough review of personal finances; a discussion of bankruptcy alternatives; and, development of a personal budget plan. The average fee for a credit counseling session (in person, telephone, or online sessions may be arranged) is $50.00 – a waiver may be granted for those who cannot afford to pay a fee.
The post-filing education course is also mandatory and completed through a DOJ-approved provider. These courses usually cover: development of a personal budget; the responsible use of credit; and, managing money and personal finances.
- Tax Returns & Proof of Income Requirement: The new “reform” law required Chapter 7 and Chapter 13 filers to show proof of income by providing a copy of their federal tax return for the year immediately preceding the filing of a petition. For those who did not file a federal return in the year prior to filing, the new law required such a filing before proceeding with bankruptcy
- Ability to File In Forma Pauperis: For the first time, debtors who do not have the ability to pay mandatory bankruptcy filing fees are allowed to file their cases In Forma Pauperis (defined by Random House as “… a time when an individual is not liable for court fees if they are considered to be “poor”). To be eligible to file with the “pauper” status, an individual must be able to prove that their income is less than 150% of the official poverty line as set by the Office of Management and Budget.
- Chapter 13 Bankruptcy for those Ineligible for Chapter 7 Protection: For those filers that cannot meet the BAPCPA’s “means test” (see below), the alternative is to file under Chapter 13 of the Bankruptcy Code. Chapter 7 and Chapter 13 bankruptcies vary in several significant ways, but the main distinction between the two is the Chapter 13 requirement of a 3 to 5-year repayment plan. Under such a plan, the debtor must repay a certain amount of money to creditors that is based upon a strict income-to-expense formulation
- Fewer “Automatic Stay” Provisions: Traditionally, bankruptcy filers were entitled to certain immediate protections from creditors and others in debt collections and lawsuits. The primary form of protection was in the form of an “automatic stay” of collection proceedings which stop further collection efforts during the pendency of bankruptcy proceedings. The adoption of the BAPCPA in 2005 put a stop to many of those protections – under the new law, there is no “automatic stay” to prevent evictions (however, if the debtor/tenant has a lease with remaining obligations, the automatic stay still applies under the BAPCA)(*), suspension of drivers’ licenses, legal actions for child support enforcement, or in divorce proceedings
(*)There are two exceptions with an “automatic stay” in landlord/tenant situations. One is in a situation where the debtor is a tenant and the creditor landlord was awarded a judgement to posses (“evict”) before the tenant/debtor filed for bankruptcy; the second is a situation that applies to a pending eviction where the tenant/debtor had been found to be using illegal drugs on the property in a manner which endangered the creditor/landlord’s property (perhaps operating a “Meth house” on the property for example) – in those situations, an automatic stay is not available (a court-granted stay, upon motion, is not likely to be granted in either of those situations)
- Priority for Unpaid Child Support and Alimony: The “reform” law provided – for the first time – for broad statutory protection for those receiving court-ordered child support and alimony. Under the prior law, such creditors were in line with other unsecured creditors without any priority protections. Under the BAPCAP, such family creditors were at the head of the line against other creditors of the filing debtor
- Non-Dischargeability of All Student Loan Debt: Prior to the enactment of the BAPCPA in 2005, attempts at significant bankruptcy “reform” had not been attempted since those that were embodied in The Bankruptcy Act of 1978. That “reform” law, amongst other provisions, included a section that, for the first time, prevented debtors with government-backed or issued student loans from discharging the debt through Chapter 7 proceedings (save for certain “hardship exemptions” that were so stringent as to be non-existent)
The “reforms” passed in the 2005 legislation took the student loan bankruptcy prohibitions a step further by including privately funded and administered student loans in the mix. This change, in retrospect, has been seen by many as a “handout” (and “payoff”?) to such private student loan lenders, many of whom are universally seen as the penultimate practitioners of “predatory lending”
- Stricter Chapter 7 Eligibility Requirements: The broadest, most far-reaching provision to impact bankruptcy filers under the 2005 “reforms” was the establishment of a “means test” [See: The “Means Test” (Chapter 7) – Part III post on this blog] as a new eligibility requirement for Chapter 7 Bankruptcy. The “means test” is state-specific as it relates to whether a filer is above or below the median income level for a given state of residency
As the Part III article (“The Means Test in Chapter 7”) on this blog discusses, the concept of “means-testing” in bankruptcy was a new and controversial provision and requirement of the BAPCPA. Some observers and commentators stand by that part of the bankruptcy law and consider it to be a “win”. Other commentators and observers, on the other hand, find means testing to be inappropriately applied in conjunction with Chapter 7 notions of equitability on the one hand, and strictness on the other – those people see mean testing in bankruptcy as a “failure” and a provision / method that deserves reconsideration.
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