Bankruptcy Reform Act 10 Year Review

The Bankruptcy Act of 1978 was the first major overhaul in the last 40 years of Bankruptcy Act of 1898. An attempt at reforming was made in 2001, but the Bankruptcy Reform Act of 2001 could not see the light of the day. In 2005, the act was finally reformed through the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This act made several significant changes to the United States Bankruptcy Code.

Aim of BAPCPA 

The main purpose of this reform was to make filing bankruptcy more difficult for debtors. As it turns out, BAPCPA has some pros and cons both for the debtors and the creditors. Let’s see what they are:

Pros of Bankruptcy Reform Act
  • Curb on frequent filers: The Act imposes a ban on frequent filers (particularly done on the eve of foreclosure sale). BAPCPA limits the number of times a person can file bankruptcy. For example, now one can file Chapter 7 bankruptcy only once in every eight years.
  • Curbs taking advantage of state exemption laws: Some state exemption laws are liberal and protect debtors’ properties. This encouraged a trend to file bankruptcy in those states. Post-BAPCPA, debtors need to file bankruptcy from a state where they have resided for a minimum of two years.
  • Curbs homestead exemptions: In order to protect their money, wealthier debtors used to purchase mansions in states, like Texas that have unlimited homestead exemptions. BAPCPA has curbed this option.
  • Tax and salary disclosure: Debtors now have to show last two tax returns and paycheck stubs to the trustee.
  • Onus of accuracy of bankruptcy filing on attorneys: BAPCPA puts the onus on bankruptcy attorneys on the accuracy of debtors’ assets and not rely on their word.
Cons  of Bankruptcy Reform Act
  • Escalated bankruptcy cost: Enactment of BAPCPA has doubled the cost of filing bankruptcy.
  • Flawed formula for ascertaining income: BAPCPA created a mathematical formula, called the ‘means test’ for evaluating the debtor’s repayment capacity. Means test is based on debtors’ last six months of income. This does not give the accurate and realistic repayment capacity of the debtor.
  • Worthless mandatory credit counseling: Debtors need to take a mandatory credit counseling class online with the aim of educating them on budgeting and money management. The counseling consists of answering some mundane questions online that is no counseling and make filers without internet access lose their homes to foreclosure.
  • Adverse effects of extended Chapter 13 bankruptcy plan: Under the act, this has been increased from three years to five years to enable debtors to pay more of their debt. The higher income debtors take advantage of it by loading up on secured debts prior to filing for bankruptcy.

Although BAPCPA is a welcome reform, it is not perfect and kinks need to be ironed out. The bankruptcy courts have to remain alert against people trying to take advantage of its loopholes.