Bankruptcy Abuse Prevention

On April 14, 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, also known as the Bankruptcy Reform Act, which President Bush is expected to sign. The new law overhauls many areas of the U.S. Bankruptcy Code.

Bankruptcy Abuse Prevention and Consumer Protection Act

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S.256) amends Title 11 of the United States Code. The Act addresses many areas of bankruptcy including consumer filings, commercial bankruptcy, and Chapter 12 family farmer reorganization. A key feature in the law is the establishment of a "needs-based" formula that directs debtors to Chapter 7 or Chapter 13 based on their ability to repay creditors.

Major provisions

The Act establishes a means test that determines whether a debtor is eligible for Chapter 7 relief, which generally discharges all unsecured debts, or must file under Chapter 13, which requires debtors to repay certain creditors in installments over three to five years. The intent is to compel debtors who are able to pay at least a portion of their debts to do so. Generally, a Chapter 7 case will be converted to Chapter 13 if the debtor can pay the lesser of (a) $10,000 or (b) the greater of (1) 25 percent of unsecured, non-priority debt or (2) $6,000. A debtor can rebut the means test by demonstrating "special circumstances," and certain "safe harbor" exemptions may apply.

Other major provisions of the Act include:

CONSUMER BANKRUPTCY

• New mandatory credit counseling–Debtors must undergo credit counseling within 180 days of the petition filing date, and must complete a personal financial management education course before they can obtain a discharge.
  
• Time between filings lengthened–A debtor who receives a Chapter 7 discharge can't receive another for eight years (up from six years under prior law). A debtor can't receive a Chapter 13 discharge within four years of a Chapter 7, 11, or 12 discharge, or within two years of a prior Chapter 13 discharge.
  
• Debtor's disclosure duties modified–Along with the documents mandatory under prior law, debtors must submit copies of tax returns, payroll stubs, and other documents with the petition.
  
• New creditor notification duty–Debtors must send effective notices to creditors of the bankruptcy filing. Creditors who do not receive such notices are not subject to penalties for violations of the automatic stay.
  
• Chapter 13 five-year payment plan expanded–Chapter 13 debtors with income over the state median must make payments over a five-year period, generally increasing the total amount they must repay. Debtors with income that is less than the state median will pay over a three-year period.
  
• Chapter 13 plan payment deductions allowed–A Chapter 13 debtor can deduct from plan payments the costs of health insurance, domestic support obligations, expenses to operate a business, and charitable contributions of up to 15 percent of gross income.
  
• Retirement savings exemption broadened–Up to $1 million held in tax exempt retirement accounts (including IRAs) is exempted. This cap may be increased if "the interests of justice so require." Prior to the Act, only ERISA qualified pension plans were unreachable by creditors.
  
• Exemption for education savings–Up to $5,000 per beneficiary held in education savings accounts is exempted, subject to certain IRS requirements.
  
• New state homestead exemption limits–Debtors who can choose a state homestead exemption over the federal exemption are bound by a prior state of residence for two years after moving to a more generous state. Further, the debtor can't claim more than $125,000 until he or she has resided in the new state for three years and four months.
  
• Residential lease exempted from automatic stay–Landlords can bypass the automatic stay and initiate or continue eviction proceedings.
  
• Non-dischargeable consumer debts expanded–Non-dischargeable debts now include state and local taxes. Federal taxes were non-dischargeable prior to the Act.
  
• Presumption of non-dischargeability limits expanded–Charges for "luxury goods and services" in excess of $500 made within 90 days of filing, and cash advances in excess of $750 made within 70 days of filing, are presumed non-dischargeable. Prior to the Act, the limits were $1,150/60 days.
  
• Domestic support obligations given top priority–Alimony, maintenance, and child support obligations have first priority among unsecured debts, are non-dischargeable, and are not subject to the automatic stay. Chapters 11, 12, and 13 discharges are contingent on full payment of all such obligations.
  
• Tenth priority created for DUI liability–Liabilities incurred in connection with operating a motor vehicle under the influence of alcohol or drugs have tenth priority among unsecured debts, and are non-dischargeable.
  
• Loans secured with personal property reaffirmation/surrender required–Chapter 7 debtors have 45 days after the petition filing date to reaffirm or redeem loans secured with personal property, or surrender the property. If the debtor fails to do so, the case is automatically dismissed.


• Secured loan payment continuation required–Chapter 13 debtors must continue making secured loan payments as originally obligated. Debtors must remit such payments to the bankruptcy trustee to be held until confirmation or denial of a payment plan.

COMMERCIAL BANKRUPTCY

• Expedited Chapter 11 created for small businesses–Businesses with less than $2 million in debts can file an expedited form of Chapter 11 reorganization.
  
• Chapter 11 exclusivity period shortened–A Chapter 11 debtor has only 18 months to propose a reorganization plan before creditors are allowed to propose their own plans. Prior to the Act, creditors were barred from making proposals indefinitely due to the debtor's ability to obtain extensions.

AGRICULTURAL BANKRUPTCY

• Chapter 12 made permanent–Chapter 12 family farmer reorganization is made permanent, and extended to include family commercial fishing operations and aquaculture.
  
• Chapter 12 eligibility debt limit raised–Family farmers must have aggregate debts of less than $3.37 million, of which 50 percent must arise from farming operations, to be eligible to file under Chapter 12. This figure is indexed for inflation. Prior to the Act, the limits were $1.5 million/80 percent, and these pre-Act rules still apply to family commercial fishing operations.–

Additionally, the Act requires bankruptcy attorneys to make reasonable inquiries to confirm that information provided to the court is "well grounded." Attorneys will be held liable for misleading statements and inaccuracies, and may incur penalties and sanctions.

The Act also requires consumer lenders to make disclosures regarding introductory rates, minimum payments, late payment deadlines and penalties for open-end lines of credit, and tax consequences of certain home equity loans.

Most provisions of the Act will be effective 180 days after the legislation is signed into law, except the consumer lender disclosure requirements (effective 12 months or 18 months after signing).