Bankruptcy and Consumer Protection Act of 2005

On April 14, 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S.256), also known as the Bankruptcy Reform Act (the Act), which amends Title 11 of the United States Code. The Act addresses many areas of bankruptcy including consumer filings, commercial bankruptcy, and Chapter 12 family farmer reorganization. A key feature in the law is the establishment of a "needs-based" formula that directs debtors to Chapter 7 or Chapter 13 based on their ability to repay creditors.

The Act establishes a means test that determines whether a debtor is eligible for Chapter 7 relief, which generally discharges all unsecured debts, or must file under Chapter 13, which requires debtors to repay certain creditors in installments over three to five years. The intent is to compel debtors who are able to pay at least a portion of their debts to do so. Generally, a Chapter 7 case will be converted to Chapter 13 if the debtor can pay the lesser of (a) $10,000 or (b) the greater of (1) 25 percent of unsecured, non-priority debt or (2) $6,000. A debtor can rebut the means test by demonstrating "special circumstances," and certain "safe harbor" exemptions may apply.

Additionally, the Act requires bankruptcy attorneys to make reasonable inquiries to confirm that information provided to the court is "well grounded." Attorneys will be held liable for misleading statements and inaccuracies, and may incur penalties and sanctions.

The Act also requires consumer lenders to make disclosures regarding introductory rates, minimum payments, late payment deadlines and penalties for open-end lines of credit, and tax consequences of certain home equity loans.

Most provisions of the Act will be effective 180 days after the legislation is signed into law, except the consumer lender disclosure requirements (effective 12 months or 18 months after signing).

Consumer Bankruptcy

New mandatory credit counseling—Debtors must undergo credit counseling within 180 days of the petition filing date, and must complete a personal financial management education course before they can obtain a discharge.

Time between filings lengthened—A debtor who receives a Chapter 7 discharge can't receive another for eight years (up from six years under prior law). A debtor can't receive a Chapter 13 discharge within four years of a Chapter 7, 11, or 12 discharge, or within two years of a prior Chapter 13 discharge.

Continued next week.

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