Republican Bankruptcy Legislation

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Endorsed and Promulgated by United States Republicans

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provided broad-reaching federal legislation with respect to Chapter 7 and Chapter 13 consumer bankruptcy filings throughout the United States. The bill was initially presented and endorsed by Republican proponents. The bankruptcy legislation was passed by the 109th United States Congress on April 14, 2005 and signed into law by President George W. Bush on April 20, 2005. The majority of the bankruptcy legislation provisions apply to Chapter 7 and Chapter 13 cases filed on or after October 17, 2005. Commonly referred to as the "new bankruptcy laws," the new bankruptcy legislation made it more difficult for consumers to erase debt by compelling more people to file Chapter 13 bankruptcy, typically known as bankruptcy reorganization, as opposed to Chapter 7 bankruptcy, commonly referred to as a straight bankruptcy.

The 2005 bankruptcy bill was actually first drafted in 1997 and first introduced in 1998. The House of Representatives approved a version titled the "Bankruptcy Reform Act of 1999" and the Senate approved a slightly different version in 2000. After the differences in the bills were resolved, Congress passed the "Bankruptcy Reform Act of 2000." However, President Clinton employed what is now known as a "pocket veto," by waiting for the lame duck congressional session to adjourn without signing the bill.

Since 2000, however, the bankruptcy reform bill was introduced in each Congress, but was repeatedly shelved due to threats of a filibuster from its opponents and because of disagreements over various amendments, including one backed by Senate Democrats that would have made it harder for anti abortion groups to discharge court fines related to felony convictions.

The increase in Republican majorities in the Senate and House after the 2004 elections breathed new life into the bill, which was introduced in its current form by the chairman of the Finance Committee, Republican Senator Chuck Grassley of Iowa. The bill was supported by President George W. Bush. Tom DeLay, the now dethroned former speaker of the house, also championed the controversial legislation.

Significant Parts of The 2005 Bankruptcy Act

Means test for Chapter 7

Under the new bankruptcy legislation, it is more difficult for individuals to file for bankruptcy under Chapter 7, which allows one to discharge almost all of their debts, as opposed to Chapter 13, under which most, if not all, debts are not forgiven. Under the old law, filers had a presumption of eligibility to file under Chapter 7, with the final determination made by federal bankruptcy judges, who evaluated the specific nature of each bankruptcy filing. Under the new bankruptcy laws, a federal bankruptcy court's judicial discretion has been diminished, and replaced in part, by a means test that is intended to more objectively determine whether bankruptcy filers have enough income to repay some portion of their debts, and thus file under Chapter 13, which in the end would primarily benefit creditors.

The Chapter 7 Means Test applies to bankruptcy filers whose gross income, based on the six month period prior to filing, is above the median income in their state. In 2005, the typical income range for states ranged anywhere from $72,451 (Massachusetts) to $42,290 (West Virginia). Individuals whose incomes were below the median automatically qualified for Chapter 7. Chapter 7 bankruptcy filers whose incomes were above the median were required to calculate their Disposable Monthly Income (DMI) to determine whether they had the ability to make payments on their debts sufficient to qualify them for Chapter 13 bankruptcy protection. Presently, the DMI is determined by subtracting priority debt payments, secured debt payments, IRS determined expense allowances, taxes and certain other expenses from a filer's monthly income. If the DMI is less than a certain set amount, they are permitted to file a Chapter 7 bankruptcy. If the DMI is above a set amount, they are required to file a Chapter 13 bankruptcy.

Additional Requirements for Bankruptcy Filers

Under the new bankruptcy law, bankruptcy filers must take a mandatory credit counseling and debtor education course. All potential bankruptcy filers must also undergo credit counseling through an approved nonprofit budget and credit counseling agency prior to filing for bankruptcy. Additionally, Chapter 13 bankruptcy filers must also complete a personal financial management course prior to filing for bankruptcy protection.

The new bankruptcy law also increases the amount of paperwork involved in bankruptcy filing and raises the bankruptcy filing fees. However, the new bankruptcy law also provides for bankruptcy filing fees to be waived for debtors earning below 150 percent of the federal poverty level.

Bankruptcy attorneys and lawyers representing bankruptcy filers are now required to conduct an investigation of their clients' filings and can be held personally liable for inaccuracies in consumer bankruptcy filings. Most bankruptcy attorneys predicted that this new potential liability would result in an increase in attorneys' fees and would make attorneys less likely to take on some bankruptcy cases. In addition, under the new law, consumer bankruptcy filings are now subject to audit in a manner similar to the audits conducted by the IRS on income tax returns.

The new bankruptcy act also eliminates some of the protections bankruptcy filers previously had, including stopping or delaying evictions, avoiding driver's license suspensions, and delaying child support proceedings. The new bankruptcy laws also incorporated several changes that effectively increased the amount of debt that Chapter 13 bankruptcy filers will have to repay. In particular, Chapter 13 bankruptcy repayment plans are now five years long, as opposed to three years under the old bankruptcy law. The recently enacted bankruptcy legislation also increases the length of time from six to eight years between which a filer can receive a Chapter 7 bankruptcy discharge.

The new federal bankruptcy law also adversely affects state homestead exemptions. Under the new law, the homestead exemption, which allows consumer bankruptcy filers in some states to exempt the value of their homes from creditors, is limited in various ways. If a filer acquired their home less than 1,215 days, or if they have been convicted of securities law violations or found guilty of certain crimes, they may only exempt up to $125,000, regardless of a state's exemption allowance. Bankruptcy filers must also wait two years before using their state's exemptions. These provisions were largely intended to prevent filers from forum shopping in bankruptcy proceedings. For example, many individuals seeking bankruptcy protection would, under old bankruptcy laws, move assets and domiciles to states with more favorable exemptions. According to various news accounts, O.J. Simpson did just this when he moved to Florida, which has an unlimited homestead exemption, and bought a multi million dollar residence and then filed for bankruptcy. Under the new bankruptcy law, forum shopping essentially is extinct.