The New Bankruptcy Law: Changes to Chapter 7 and 13

The latest major transformation in bankruptcy law was enacted on April 20, 2005, with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act. This law changed and added key revisions of current bankruptcy laws in the United States, particularly with Chapters 7 and 13. The purpose, as stated by its supporters, was to make certain types of bankruptcy more difficult to pursue for individuals and businesses. This was in response to claims that the bankruptcy protections under law had been abused for years.

One of the major changes to bankruptcy law with the new bankruptcy law was the addition of a test for income for bankruptcy applications. Under Chapter 7, a debtor's income will be calculated with a formula that takes into account the median income for the area, your assets and income, and whether or not you can pay 25% of what is called "nonpriority unsecured debt", which is most commonly found with credit card debt. If this new income calculation is above the median income for the area, a means test is applied. Failure of the means test means the debtor is considered to have abused his or her credit and is not eligible for Chapter 7 bankruptcy.

For Chapter 13 bankruptcy, the only major change involves the calculation of expenses. Under Chapter 13 bankruptcy, a debtor subtracts their living expenses from their income to determine disposable income, which is then used to repay debt. With the new bankruptcy law, the IRS uses a different formula to calculate allowable expenses, which often is less than the actual expense amount.

For both Chapter 7 and Chapter 13 bankruptcy, the petitioner must enter into credit counseling. The counseling session must occur with a qualified official within 180 days prior to filing for bankruptcy. Any repayment plan created by the counselor does not have to be followed, but it does have to be sent to the bankruptcy court with the bankruptcy application.

Additionally, property is now valued at replacement cost, not auction cost, which often is higher than the amount it costs to replace a home. Lower value makes seizure of property by a trustee easier than it would be if a higher value were used.