Before the new bankruptcy laws were approved, a multitude of debtors have taken the right to avail of bankruptcy protection for granted. Debtors who could not pay their debts either because of untoward accidents or negligence easily turn to bankruptcy to liquidate their debts and “start anew” financially. Although the United States Code meant bankruptcy to be a privilege of every citizen in the country, it does not encourage its citizens to declare bankruptcy at every financial crisis they encounter.
With this predicament in mind, the legislators of the country approved the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in October 17, 2005. This law is otherwise known as the Bankruptcy Act of 2005 and its primary purpose is to prevent debtors from abusing bankruptcy declarations. It imposes stricter eligibility criteria so that debtors are carefully screened upon bankruptcy application and other restrictions are made to protect credit interest.
Below are some of the most prominent changes made to the existing bankruptcy laws to improve the federal and state-specific laws.
1. Credit counseling – before BAPCPA was implemented, credit counseling was not mandatory. Now, the new bankruptcy law made credit counseling program mandatory for all debtors who plan to file for bankruptcy. The agency conducting the counseling program should be accredited by the National Foundation for Credit Counseling (NFCC) and it should orient debtors on how to manage personal finances and present bankruptcy options. The debtor should complete the program 6 months prior to the formal petition for bankruptcy.
2. Means test – the most abused bankruptcy program in the country is Chapter 7 because it offers the liquidation of the debtor’s dischargeable debts. When the new law was passed, one of its focus was the enforcement of a means test. This evaluation compares the monthly income of the debtor against that of the state’s median income level. If the result of the test proves that your income is above the state’s median then you will not qualify for a Chapter 7 bankruptcy.
3. Disposable income – this is another way to qualify for the means test where the national and local expenses are subtracted from the average monthly income. Should the remaining disposable income be enough to pay for 25% of the dischargeable debts, then the debtor is disqualified.
4. Debt counseling – where there was no credit counseling, there was also no debt counseling. In the new law passed in 2005, before the bankruptcy case ends, the debtor is again mandated by the federal courts to undergo another debt counseling program to talk about debt management strategies. The purpose of this provision is to help the debtor not commit the same mistake twice, and to not file for bankruptcy again and again.
5. Tax returns – during the filing of paperwork for bankruptcy declaration the latest tax returns should be should be included. If the debtor hasn’t filed for taxes, a return should be completed or else your application will be denied.
Federal bankruptcy laws provide a safety net for debtors in need of real help. The new laws imposed all throughout the country prove that bankruptcy should not be taken lightly and although it does not discourage, it also does not encourage its citizens to file for bankruptcy if there is no need for one.