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Thoughts on our New Federal Bankruptcy Law

On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Six months after that date (October 19, 2005) it will become fully effective. You will be hearing a great deal about BAPCA in the next several months. My prediction is that most of what you will hear will be coming from the consumer advocate opponents of this bill, however they are a little late and they never were a real match for the lobbying efforts of the major financial institutions and credit card companies that successfully changed our bankruptcy law as we have known it–while dramatically improving their bottom lines.

It is reasonable to expect that we will see an increase in the filings of Chapter 13 bankruptcies–which require debtors to make payments for up to five years on at least a portion of their debts rather then having their debts fully discharged in a Chapter 7, and that virtually no changes will be seen for Chapter 11’s–which primarily relate to large business insolvency situations.

Some Specifics

1. There will be increased court costs and time delays for an individual desiring to file a Chapter 7 bankruptcy. That person will be required to take and certify that he/she has taken certain credit counseling courses (at their own expense) at least six months prior to the filing of a bankruptcy.

2. In order to be able to file for a Chapter 7 bankruptcy a person will have to establish for the bankruptcy court that he is qualified under BAPCA’s “means test”. This is determined by a complicated two phase formula that will compute living expenses based on IRS determinations of how much money a person living in a particular area of the country should reasonably spend for their living expenses (irrespective of the fact that their living expenses may be greater then these IRS numbers) AND that their income is below their State’s medium income average.

3. Bankruptcy lawyers under BAPCPA will not be allowed to just accept what their client’s tell them. They will have to essentially cross-examine their clients and the clients will have to prove to their attorneys that they are appropriately filing for a Chapter 7 Bankruptcy. Attorneys will be personally responsible for all of the prior and current financial dealings of a client. If irregularities are discovered the attorney can be held liable for the consequences of those irregularities which will include fines, penalties and even a requirement to pay all of the attorney fees incurred by the bankruptcy trustee in making their challenges against an attorney’s client.

4. Bankruptcy attorneys that continue to desire to work in this area will need to spend significantly more time and money to fully inform themselves of all of the prior financial dealings of a client, they will need to document that activity and sign and verify that it is true at the time that a bankruptcy is filed.

(Until the implementation and the consequences of how this new law is going to be enforced our offices will not be representing clients in Chapter 7 Bankruptcy proceedings.)

A speaker at a recent seminar that I attended sees legal work, fees and costs increasing by at least 3-5 times over current levels by responsible counsel–He said that he was going to hire a private investigator (at the client’s expense) to investigate his client’s financial records before he files a Chapter 7 on their behalf.


1. If your financial situation is tenuous and a chapter 7 bankruptcy is reasonably being considered then a conference with a bankruptcy attorney should occur at this time and if a 7 is your best option then it should be done before October 19, 2005.

2. With the Chapter 7 Bankruptcy “net” now gone one’s personal knowledge, responsibility and control over one’s own financial affairs needs to be raised to highest levels ever.

3. Small Business Owners: It is reasonable to expect that Chapter 7 filings between now and October 19, 2005 will increase, so really get to know and talk to your customers and clients now. A side benefit to this activity is that while minimizing your losses it should also increase the quality and quantity of your customer and client base as you increase your knowledge and communication with them.

The Big Picture

The founders of our country allowed for Bankruptcies in our constitution and even the Bible speaks of forgiving one’s debts every six years. Chapter 7 bankruptcies have given many good people a fresh start when their mistakes or life events overwhelmed them. Bankruptcy is not a free ride–one “pays” for a bankruptcy by having it on their credit report for 10 years.

Most people who file bankruptcies do so because they have lost employment, gone through a divorce or incurred a debilitating injury or illness. The vast majority of people want to, and do, pay their bills. BAPCPA appears to be throwing out the baby with the bath water.

The positive effect of BAPCPA could be that long range personal responsibility for one’s financial affairs will greatly improve–and “excuses” such as, “I didn’t ask for more credit, they just kept giving it to me” will be a lost idea.

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