The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA, was signed into law by President Bush on April 20, 2005, with the intent of making it more difficult for citizens to file for Chapter 7 bankruptcy. Many of these people are able to file for Chapter 13 instead. The BAPCPA was such a dramatic overhaul of US bankruptcy code that it is often referred to colloquially as simply "New Bankruptcy Law."
As a means of recap, Chapter 7 is a form of liquidation bankruptcy, in which non-exempt property is liquidated and the proceeds from the sale used to repay the filer's outstanding debt. Chapter 13, on the other hand, is a form of reorganization bankruptcy, in which the filer receives government protection while he or she restructures their debt and begins to pay it off over a set period of time, usually between three and five years.
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The BAPCPA's main goal was to make it more difficult for individuals and businesses to file for bankruptcy. Perhaps the largest single largest change to United States bankruptcy code made by the BAPCPA was the institution of a "means test." This test was meant to check for abusive bankruptcy practices. Only about 15% of debtors are actually subject to the test, the qualification for which is having a monthly income higher than the median income for the state.
The purpose of this test was to make it harder for debtors to have their debts forgiven, which costs the lending institution money. However, since only 15% of the people filing for bankruptcy are subject to the test, that leaves 85% in the clear, leading to charges by critics of the Act's ineffectiveness.
The way Chapter 7 worked in the past was that by filing for liquidation bankruptcy, it was assumed that you were unable to pay back any part of your debts, hence the liquidation sale. However, this presumption was replaced by the means test, which itself has holes in its logic. If you have fall into the 85% of bankruptcy claimants making under the state median monthly income, you are automatically able to file for Chapter 7 bankruptcy.
If you fall into the 15% above the median monthly income for your state, you must determine your conditions for filing Chapter 13 bankruptcy based on your disposable monthly income.
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