In 2005, Congress enacted new bankruptcy laws which radically altered the way debtors could obtain debt relief. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) require debtors to repay a portion of debts under Chapter 13 and obtain credit counseling through an approved U.S. Trustee agency.
The new bankruptcy laws have made submitting a bankruptcy petition more costly and complex. BAPCPA was intended to prevent consumers from incurring high levels of debt through careless spending, than filing bankruptcy to avoid repayment. However, the stringent guidelines have made it challenging for debtors to obtain debt relief through legal channels.
Prior to BAPCPA, filing personal bankruptcy was relatively simple. Debtors hired a bankruptcy attorney to submit a petition for debt relief. Most debtors filed for Chapter 7 in order to have debts discharged and obtain a fresh start. Oftentimes, filing bankruptcy was simple enough for consumers to file petitions without legal counsel.
The new bankruptcy laws put an end to that. Today, debtors are required to undergo the ‘means’ test to determine the amount of debts to be repaid. The means test compares debtors’ income to their states’ median income levels. Those earning equal to or greater than median levels are required to establish Chapter 13 payments. Those earning less than median levels may qualify for Chapter 7.
In October 2008, a new median income plan was devised which bases income levels on family size. A complete list of state income levels is provided at the U.S. Trustee Program website at Justice.gov, along with complete details of BAPCPA regulations.
In addition to developing a Chapter 13 payment plan, debtors are required to undergo credit counseling. Bankruptcy lawyers often recommend debtors obtain credit counseling prior to petitioning the court. In many instances, credit counselors can help debtors negotiate outstanding balances or create a workable payment plan without the need for filing bankruptcy.
It is also recommended that debtors obtain credit counseling through an approved U.S. Trustee agency. If credit counseling is insufficient in obtaining required debt relief, debtors will have met the counseling requirement and will not have to undergo the process again if bankruptcy is required.
Debtors should consider bankruptcy alternatives such as debt consolidation, debt settlement, and budgeting. These options can sometimes provide debt relief without the financial consequences associated with personal bankruptcy.
Bankruptcy remains on credit reports for 7 years; making it difficult for debtors to obtain credit of any type for years to come. Debtors can witness a decline of 100 points or more against their FICO scores. Declining credit scores place debtors into lower credit bracket which will cause them to pay considerably higher interest rates if credit can be obtained.
Chapter 13 payment plans typically extend for 2 to 3 years. Debtors are prohibited from incurring new debt without court authorization during the repayment plan. If debtors are unable to adhere to their Chapter 13 plan, creditors can request bankruptcy dismissal. When personal bankruptcy petitions are dismissed, debtors lose court protection and creditors can commence with collection action.
Anyone considering bankruptcy should consult with a bankruptcy attorney and carefully weigh the pros and cons of this decision. The long-term effects can haunt borrowers for many years. However, if debtors can adhere to payment plans, bankruptcy can allow them to retain valuable assets and overcome debt challenges.
U.S. Trustee Program State Medium Income Level Chart
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005