What is the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)?
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 is legislation that revised the United States Bankruptcy Code for cases filed on or after October 17, 2005. In April 2005, the BAPCPA was adopted by Congress and enacted by President George W. Bush to reform the bankruptcy system.
Key points to remember
- The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), passed in 2005, is a law that reformed the personal bankruptcy process in the United States.
- Under the BAPCPA, filing for Chapter 7 personal bankruptcy became more difficult as more stringent guidelines and eligibility requirements were set.
- The goal was to prevent the bankruptcy process from being abused and to encourage Chapter 13 filings instead of the more lenient Chapter 7.
- Certain retirement assets, including traditional and Roth IRAs, received federal bankruptcy protection for the first time under the BAPCPA.
Understanding the Bankruptcy Abuse Prevention and Consumer Protection Act
Under Chapter 7 Bankruptcy, most not guaranteed consumer and business debts are forgiven or paid off. This bankruptcy plan also allows for the liquidation and sale of certain assets by a curator in order to repay creditors.Alternatively, the bankruptcy filed under Chapter 13 obliges debtors to repay part of the debt before debt relief is considered. Chapter 13 bankruptcy requires debtors to restructure their debts and create a three to five year repayment plan, under which the debtor will use future income to repay creditors in part or in full.The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was introduced to make it more difficult for debtors to file for Chapter 7 bankruptcy and, instead, force them to file a claim at chapter 13.
The law created a bankruptcy means examination that determines whether individuals who file for bankruptcy can file for Chapter 7 bankruptcy, which releases many debts in full – or whether they should opt for Chapter 13 bankruptcy, which requires at least partial debt repayment. In addition, the Act has increased the waiting period between when a person last filed for Chapter 7 bankruptcy and when they can file a new return to eight years.
BAPCPA and chapter 7
Essentially, the purpose of the BAPCPA was to make it harder for high income earners to qualify for Chapter 7 bankruptcy by taking a closer look at the filer’s ability to repay debts. The means test compares the debtor’s monthly income to the median income (which depends on household size) in their state of residence and provides an allowance for deemed monthly expenses, at rates determined by the IRS, as well as a allowance for actual expenses. monthly expenses.
If the individual exceeds the median income and has some money after factoring in living expenses, he will generally not be eligible for Chapter 7 bankruptcy. Indeed, three outcomes are possible from the condition of. resources:
- A debtor will pass the means test if his disposable income is less than $ 136. They will therefore be able to file for Chapter 7 bankruptcy without any problem.
- A debtor will fail the test if their disposable income each month is more than $ 227. In this case, they must proceed according to chapter 13.
- If a debtor’s disposable income is between $ 136 and $ 227 per month, the income should be multiplied by 60 (BAPCPA assumption that the debt will be repaid in about five years, or 60 months). If the resulting value can cover at least 25% of the non-senior unsecured debt, the debtor will fail the test. Otherwise, they can file for Chapter 7 bankruptcy.
Consumers and businesses planning to file for bankruptcy must complete a licensed, nonprofit credit counseling program no more than 180 days before filing.
To meet a means test, a debtor must submit Form 122A – 1 for Chapter 7 or Form 122C for Chapter 13 in Bankruptcy court before the court hears the case.
BAPCPA also set up mandatory credit counseling for consumers and businesses wishing to file for bankruptcy.
To avoid any potential abuse of the bankruptcy system, the BAPCPA exempts certain debts from discharge. Some of these debts are:
- Over $ 750 in cash advances on a credit card withdrawn within 90 days of deposit
- Over $ 500 charged to a credit card for luxury products within 90 days of deposit
- All federal and private student loans
Most of the studies that have looked at the effectiveness of BAPCPA to reform bankruptcy have concluded that the profile of consumer bankruptcy debtors has not changed. This suggests that the means test has not led to more high income debtors making more payments to creditors. Instead, those who need it may just delay the search. bankruptcy recovery.
BAPCPA and IRA protections
The enactment of the BAPCPA brought about another change: the federal protection of individual retirement accounts, or IRAs. Although federal bankruptcy laws have long protected 401 (k) plans, pensions and similar qualified employer sponsored pension plans, before the adoption of BAPCPA, ARI protections were set at the state level, or not at all. After the law was passed, people in all states got bankruptcy protection for IRA assets.
Protection under BAPCPA varies depending on the type of ARI. Traditional ARIs and Roth IRA are currently protected at a value of $ 1,362,800, with adjustments for inflation every three years (the next adjustment is in 2022). SEP IRA, SINGLE IRA, and more Rollover IRA are fully protected from creditors in bankruptcy, regardless of dollar value.