Significant Changes to the Bankruptcy Code under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA): The Presumption of Abuse and Qualification for Chapter 7 Discharge.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) represented the most sweeping change to the Bankruptcy Code since the modern bankruptcy code was enacted in 1978. It was roundly criticized and opposed by the bench and bar, consumer advocates, and legal commentators, but a potent lobby by creditors, led by credit card banks were able to convince the Congress to enact the significant amendments which were viewed as largely business friendly changes to the law.

Perhaps the most significant change to the bankruptcy code under BAPCPA was the “Presumption of Abuse.” Under the pre-BAPCPA bankruptcy code, debtors could file for bankruptcy under Chapter 7 liquidation or total discharge, regardless of their income level. Under the BAPCPA amendments, debtors had to prove that they qualified for Chapter 7 bankruptcy. BAPCPA creates a method to calculate a debtor’s income, and compares this figure to the median income of the debtor’s state. If the debtor’s household income falls below the median income for the state, then the debtor automatically qualifies to file for Chapter 7 bankruptcy.

If the debtor’s income is above the median income amount of the debtor’s state, the debtor is subject to a “means test.” The means test works roughly like this:

The debtor first calculates the “current monthly income” comprised of all sources of income for the household. The debtor’s current monthly income is then offset by a set of deductions specified by the Internal Revenue Service. In general, the allowable deductions applicable in the means test include:

1. Certain specified living expenses,
2. Contributions to care of nondependent family members,
3. Expenses of administering a Chapter 13 repayment plan,
4. Educational expenses up to $1,500 annually per child,
5. Home energy costs,
6. A percentage of certain secured debt,
7. Expenses “reasonably necessary health insurance, disability insurance, and health savings account expenses,”
8. Expenses for protection from family violence,
9. A percentage of all priority debt, and
10. Contributions to tax-exempt charities.

After the debtor’s income and expenses are summed, the court or trustee considers whether a “presumption of abuse” exists. Such a presumption exists if the debtor has at least $166.67 in current monthly income after the allowed deductions, the debtor has at least $100 of such income and this sum would be enough to pay general unsecured creditors more than 25% over five years (i.e., they could successfully enter into a Chapter 13 repayment plan). Absent special circumstances, if the debtor “fails” the means test, he or she cannot seek Chapter 7 liquidation or total discharge. Rather, he or she must petition for a repayment plan under Chapter 13.

Justin M. Baxter
Baxter & Baxter, LLP
Portland, Oregon
(503) 297-9031

http://www.baxterlaw.com