BAPCA – The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCA) was signed into law by President Bush on April 20, 2005, and BAPCA is the law for bankruptcies filed on or after October 17, 2005. The greatest complaint from debtors and their lawyers is that the additional “busy work” required by BAPCA has driven up the cost of filing bankruptcy by a few hundred dollars. Even under the new law, bankruptcy still provides the exact same “fresh start” relief afforded to consumers struggling with their debt.
The greatest change to the Bankruptcy Code brought about by BAPCA is that now debtors must qualify to file a Chapter 7 bankruptcy. This is not as terrible as is sounds. According to recent studies, approximately 85% of debtors who filed their case before BAPCA would have qualified to file under the new guidelines. A debtor who does not qualify may still file bankruptcy under Chapter 13 of the Code.
(1) Safe Harbor – Below Median Income for the State of Florida – A debtor whose household income falls below the median income for the State of Florida automatically qualifies to file a Chapter 7 bankruptcy. The “median income” is reported by the United States Census Bureau, and it represents the 50th percentile of household income. In other words, exactly one-half of Florida’s households have an income less than the reported “median income.”
(2) What is included in income? Basically, all taxable income is included when determining household income, but there are certain types of common income not included, such as SSA benefits and income tax refunds.
(3) Means Test – Is there a presumption of abuse? – If a debtor’s household income is greater than the reported median income for the State of Florida, the debtor must complete a complex form known as the Means Test. This is a financial analysis that compares the debtor’s income to his “allowable” expenses to determine whether the debtor has disposable income that could be used to pay a percentage of the debt he is seeking to discharge in the Chapter 7 bankruptcy. The debtor’s actual expenses are not always used in the analysis. Rather, the debtor must use national and local standards published by the Internal Revenue Service.
(a) U.S. Trustee’s Office – Since the enactment of BAPCA, the U.S. Trustee’s primary responsibility is the enforcement of the many ambiguous rules created by the bankruptcy changes. Number one on the list is making sure that the debtor’s attorney completes the Means Test Form correctly, but since the form itself is subject to interpretation, and even the bankruptcy judges disagree on interpretation, the outcome may vary from case to case.
(4) Special Circumstances – If the debtor “fails” the Means Test, then the debtor cannot file a Chapter 7, unless the bankruptcy judge determines that there are special circumstances that allow the debtor to remain in Chapter 7. For instance, if the debtor’s current monthly income (“CMI”) is artificially inflated by a one-time severance payment that causes his household income to fall above the median income, the judge may allow the debtor to remain in Chapter 7.
(5) Projected Means Test -- There are times that a projected means test may be filed showing the debtor's financial circumstances have changed going forward from the past six months prior to filing.