Happy Early 15th Birthday, BAPCPA!

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Sep 30
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“I thought you had to wait six years between Chapter 7 filings.”

“What’s credit counseling? I didn’t have to take that the last time I filed.”

“What is the means test?”

In the last 15 years, we’ve heard these questions and more, and you can thank Congress for this. They passed a law signed by President George W. Bush in April 2005 called the Bankruptcy Abuse Prevention and Consumer Protection Act. Most bankruptcy lawyers call it BAPCPA, when we aren’t using other less flattering nicknames for it.

This was the biggest change to bankruptcy since the 1970’s and still shapes how we practice and advocate for our clients today. Most of the provisions went into effect on October 17, 2005, so happy early fifteenth birthday, BAPCPA!

Granted, not all the changes were bad. For starters, for years there was a chapter of bankruptcy devoted exclusively to family farmers and fishermen called Chapter 12. It was only meant to be temporary, but BAPCPA made it a permanent part of the code. So, if you or someone you know is in Chapter 12 today, you can thank Congress for letting our firm practice in this specialized form of bankruptcy law.

Of course, we don’t love all the changes. Before this change, stories floated around of rich people using Chapter 7 to wipe out their debts without trying to make a repayment plan. Other stories included professionals like doctors or lawyers completing their education, and immediately filing for bankruptcy to eliminate their student loans. These stories were few and far between, if they were even true, but they were enough to convince Congress to change the law.

Now we have “means testing” as a part of bankruptcy. Means testing makes us look at the last six months of income of a filer (individually or as a household) and project its growth over time. If the filer is making more than what the “median income level” (50 percent of people make more, 50 percent make less) for their household size, they have to complete a second analysis to see if they can qualify for Chapter 7 or if they’re required to pay a certain amount back to unsecured creditors like medical bills and credit cards. Confused? This was a game changer and has forced some people to go to Chapter 13 or 11 instead of Chapter 7.

Congress also insisted that every individual person who files must take a course in credit counseling and in debtor education, the first course before filing and the second after. The purpose is to get information about budgeting and financial education. When each course is completed, the filer receives a certificate. Although most people have little or no choice but to file for bankruptcy, taking these courses and receiving the certificates is still a requirement for everybody, rich or poor, no matter why they file (a failed business, job loss, medical problems, a serious accident). Unless there are extreme emergencies (think Hurricane Katrina, fifteen years ago), the law is the law. No certificate, no bankruptcy.

Instead of waiting six years from the filing of one Chapter 7 bankruptcy to begin another, the timeframe was extended to eight years. If the filer can’t wait, he or she can file another chapter of bankruptcy, explore state court options (like Chapter 128 in Wisconsin or debt repayment plans), or otherwise be at the mercy of creditors.

One of the most worrisome changes affects student loans. College (including law school for you attorneys here) has become increasingly expensive over the years, and nearly everyone needs some sort of financial aid. Over time, discharging (eliminating) student loan debt has grown more and more difficult. At this time, whether the loan is privately issued or issued by the government, the loan is not dischargeable in any form of bankruptcy unless the filer sues the issuer of the loan in a separate action and proves, under a very high threshold, an “undue hardship.” The effect is that student loan discharges are incredibly rare and have become frustrating for borrowers and their attorneys to pursue.

Individuals, families, and businesses were filing bankruptcies long before BAPCPA was passed and they continue to do so. Lawyers will continue to help people get credit counseling, analyze any means test issues, and advise on dischargeability of student loan and other debt. The laws may change, but lawyers persist in serving clients’ needs.

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