The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more difficult for debtors to gain an advantage by strategically choosing one type of personal bankruptcy procedure over another. It also tightened the standards for each type of bankruptcy, making the process more challenging for debtors to use.
Chapter 7 Vs. Chapter 13 Personal Bankruptcy
To understand the 2005 changes to U.S. bankruptcy law, it is important to first know the distinction between Chapter 7 and Chapter 13 personal bankruptcy. In a Chapter 7 bankruptcy, the debtor's assets -- except those specifically exempted from creditors -- are liquidated. The bankruptcy trustee sells the assets and gives the proceeds to creditors. The remaining debts are discharged. In a Chapter 13 bankruptcy, the debtor is put on a repayment plan under the supervision of the court and a bankruptcy trustee. A certain portion of the debtor's income is used to repay debts over the course of up to 5 years.
Qualifying for Chapter 7
One of the primary changes in the 2005 bankruptcy law was to make it more difficult to qualify for Chapter 7 bankruptcy. Prior to 2005, a judge considered all the circumstances and made an assessment of whether the debtor could file a Chapter 7 case. After 2005, eligibility is determined using a two-part test: first the court ascertains if the debtor's income is above the state median, and if so, whether the debtor can afford to pay 25 percent of his general, unsecured debt after allowed expenses, such as food and rent, are deducted. If the debtor's income is above the state median and he can afford to pay his creditors, he does not qualify for Chapter 7. If the debtor's income is below the state median but he has enough discretionary income to pay creditors, he may also be ineligible for Chapter 7 under the new rules.
How Much the Debtor Can Afford to Pay
Prior to 2005, when a debtor filed under Chapter 13, the court and debtor would work together to determine the debtor's reasonable expenses. Then the court would determine what amount the debtor could afford to pay each month towards his debts. After the 2005 changes, however, this amount is instead determined by a formula, using the stricter IRS standards for food, housing and other expenses. There is no allowance for discretionary expenses: only household and personal expenses are permitted. Although it is possible for debtors to have these standards altered by requesting a hearing, doing so adds time and expense to the bankruptcy process.
Another major change in the 2005 law was the tightening of homestead exemptions. Prior to 2005, the amount of home equity that a bankruptcy debtor could exempt, or protect, from creditors was determined by each state, with debtors given the freedom in many cases to elect between the federal exemption amount and their state exemption amount. The 2005 law, however, prevents debtors from using more generous state standards if they have not lived in the state for at least two years. It also caps the exemption at $125,000, regardless of state law, if a debtor purchased his home within the 40 months prior to filing bankruptcy, or if the debtor violated securities laws or engaged in certain other criminal conduct.
The End of "Super-Discharge"
Another significant change in the 2005 law was the elimination of the "super discharge." Prior to 2005, many federal bankruptcy courts had interpreted Chapter 13 as permitting the discharge of liability for unpaid taxes, including penalties for nonpayment or tax evasion. This was commonly known as a Chapter 13 "super discharge." The 2005 bankruptcy law put an end to this practice. Debtors under Chapter 13 now cannot discharge most tax-related debts, although taxes incurred at least two years before the bankruptcy may be discharged under certain circumstances.
The 2005 bankruptcy law made other changes as well. Among these is a requirement that the debtor see a federally-approved credit counselor in the six months prior to filing for bankruptcy, and pay for money management classes after his debts are discharged. The 2005 law also sought to eliminate serial filings by limiting a debtor to one Chapter 13 filing every two years, and mandating that three years must pass between a Chapter 7 and a Chapter 13 filing by the same debtor. The 2005 law also placed responsibility for accuracy more squarely on the shoulders of lawyers, imposing penalties if inaccurate information is given to the court.