Bankruptcy reforms focused mainly on income eligibility for Chapter 7 cases
In 2005, the country's bankruptcy system underwent reforms that the U.S. Department of Justice called "a new era in the history of bankruptcy law and practice."
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed by federal lawmakers to stem the growing number of debtors who may have used bankruptcy to escape their debts, but could afford to pay back at least some of the money they owed creditors.
"The reform made filing bankruptcy more difficult by requiring debtors with higher incomes to repay more, by making it much more complicated and expensive for all debtors to file, and by increasing the number of debtors who are ineligible for bankruptcy," according to the National Bureau of Economic Research.
The biggest change was the introduction of a "means test" to establish a person's eligibility for filing under Chapter 7 of the bankruptcy code. As a liquidation process, it is the most straightforward form of personal bankruptcy, which allows many debtors to exempt their major property - homes, cars and personal belongings - but forces them to sell other possessions to pay their bills.
In short, most debtors are eligible for Chapter 7 if their income falls below the median income for a family of their size in the state where they live. In some cases, people may exceed that average and still file a Chapter 7 case. But most will be considered eligible for Chapter 13, which requires those with regular earnings to pay their creditors through a court-ordered repayment plan over several years.
Another intent of BAPCPA was to provide debtors with financial knowledge to help them with their current circumstances, and to hopefully prevent fiscal problems in the future.
A credit counseling course must be completed within the six months prior to filing for relief in U.S. Bankruptcy Court. It helps people to decide whether bankruptcy is the best route for them to take, or if they should negotiate a payment plan with their creditors. A second course in financial management, which teaches ways for people to avoid future debts, is required of filers within 45 days of their meeting with creditors before a court trustee.
Finally, the 2005 reforms included additional court oversight of small businesses that sought relief under Chapter 11, which allows companies to reorganize their debts by paying a portion of what they owe to creditors.
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