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The 2005 Bankruptcy Act

The current bankruptcy code is known as “BAPCA” – the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. It became effective October 31, 2005, and changed the face of bankruptcy in several significant ways.

The “Means Test”

The “means test” has altered the entire approach to consumer bankruptcy. Prior to October 31, 2005, so long as an individual consumer debtor could show that the debtor’s income was used up paying the debtor’s living expenses, and paying any mortgage payment or car payment that the debtor “reaffirmed” or “retained,” then the debtor was able to file for Chapter 7 bankruptcy protection. Chapter 7 does not require the debtor to make any payment to the court or to the debtor’s creditors.  Chapter 7 is a very fast proceeding. The initial hearing is held typically within a month after filing the case; and the discharge is granted within 60 days after the hearing  -  a total of 90 days. Chapter 7 cases are often referred to as “straight bankruptcy,” although officially the title is “Chapter7: Liquidation.”

However, the 2005 Act implemented an “income test” that includes not only the debtor’s income, but the income of the entire household of which the debtor is a member.  For each federal district, the Internal Revenue Service (IRS) establishes a “means” or average income of households within that district based taking into account the number of people within each household. The following figures comprise the “mean” income in Oregon as of April 1, 2013:

One member household: $43,160
Two member household: $55,057
Three member household: $62,202
Four member household: $67,315
More than four: Add $7,500 for each additional member

If the debtor or the debtor’s household is over the means, the debtor cannot file for Chapter 7 protection but must file a Chapter 13 case. The debtor must pay all of the debtor’s surplus income (after living expenses) into the Chapter 13 plan. The debtor and Chapter 13 trustee typically negotiate the exact amount of the monthly payment. Tax refunds are normally paid into the plan. A Chapter 13 plan must last for 60 months when the debtor’s income exceeds the means.

The IRS also has established a schedule of reasonable living expenses for each federal district covering the basics such as rent, food, medical, clothing and the like. Debtors cannot claim higher expenses unless there are special circumstances: higher expenses are permitted for existing medical conditions and other special needs as long as the debtor can document the needs and provide receipts.

A debtor who successfully completes the Chapter 13 plan receives a discharge of all remaining debt at the end of the plan.

Debtors who are under the median income can file for Chapter 7 protection so long as their income does not exceed their living expense budget, which would create a surplus amount of income each month, which could conceivably be paid into a Chapter 13 Plan.

Chapter 13 plans are usually described by the percentage of debt that is repaid. A debtor might file a 10% plan or a 30% plan or even a 100% plan, meaning that is the percentage of the debtor’s total general unsecured debt that will be repaid over the 60-month plan. There are plans where the debtor owes significant income taxes and debtor’s general unsecured creditors will get nothing  - only the taxes will be paid. Such plans are referred to as 0% plans  -  not because the debtor pays nothing into the plan, but because the payments do not go to the general unsecured debt.

Mandatory Credit Counseling

The 2005 Act requires that each debtor take two classes. First, prior to filing the bankruptcy case, a debtor must take the Creditor Counseling Class, which reviews the debtor’s financial history and analyzes the debtor’s credit history.  Many provider organizations offer these classes  - all for a small fee ($15-$50). Each of these providers has to be approved by the Department of Justice’s United States Trustee’s office. The debtor receives a written Certificate after taking each class by fax or e-mail. These certificates must be filed with the court. A debtor cannot receive a discharge without filing both class Certificates.

The second class is a financial management class (aka Debtor Education Class) and should be taken after filing the bankruptcy case and within 30 days after completion of the initial hearing - the §341(a) Meeting of Creditors.

If a husband and wife are filing together, each one must take both classes and each must receive a certificate of completion.

Length of Time Between Filings

The allowed time between Chapter 7 bankruptcy filings was changed by the 2005 Act from a full six years (a debtor could file a new case on the 7th anniversary of the first filing) to a full eight years (the debtor must wait to file a new case until the 9th anniversary). This applies only to cases where the court entered a discharge of debts, not to cases that were dismissed or voluntarily abandoned by the debtor prior to the entry of a discharge of debts.

So, when a discharge of debts has been entered:

Chapter 7 case followed by another Chapter 7 case
8 full years
Chapter 7 case followed by a Chapter 13 case
4 full years
(Note: a debtor can file a Chapter 13 any time after filing a Chapter 7; however the new Chapter 13 case cannot later be converted to a Chapter 7 case until 4 years has passed from the Chapter 7 filing).

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