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Guide To Understanding The Bankruptcy Abuse Prevention And Consumer Protection Act

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Limits to the Homestead Exemption

Under the new law, the homestead exemption, which allows bankruptcy filers in some states to exempt the value of their homes from creditors, is limited in various ways. If a filer acquired their home less than 1,215 days (40 months) prior to filing, or if they have been convicted of security law violations or been found guilty of certain crimes, they may only exempt up to $125,000, regardless of a state's exemption allowance. Filers must also wait two years before using their state’s exemptions.

These provisions were largely intended to prevent filers from forum shopping, i.e. moving assets and domiciles to a state with more favorable exemptions and filing. It was alleged that O.J. Simpson did this when he moved to Florida, which has an unlimited homestead exemption, and bought a multi-million-dollar residence and then filed for bankruptcy. However, it is not clear if the new law’s 1,215-day restriction would have applied to this example because the wording of the legislation leaves an ambiguity concerning whether it applies to states where federal exemptions are not available (such as Florida and Arizona). Definitions of federal exempt property and the valuation rules for that property are also more precisely defined in a manner favorable to creditors compared to current law.

Other Changes

• The new law allows creditors to pursue collection remedies without court permission in various circumstances such as offsetting tax refunds, pursuing tax and domestic relations litigation in all respects except the final turnover of assets from the estate, establishing wage assignments in domestic relations actions, repossessing vehicles and personal property subject to loans or leases 45 days after the first meeting of creditors in cases where no court action has been taken regarding that property, and allowing evictions that completed the court process prior to the filing of the petition or involve endangerment to property or drug use to proceed. The law also makes it easier for creditors who received preferential payments of less than $5,000 from the debtor before bankruptcy to avoid repaying such payments for the benefit of all creditors.
  
  
• The law improves the ability of the bankruptcy estate to reclaim assets placed in asset protection trusts within ten years of filing or paid as employment bonuses to insiders within two years prior to filing.
  
  
• The law makes Chapter 12 bankruptcy (farm reorganization) permanent while adding family fishermen, overhauls the treatment of complex financial contracts including many derivative contracts used by hedge funds, and overhauls the treatment of ancillary foreign bankruptcy proceedings.
  
  
• The law extends protection to non-ERISA pension plans like private sector 403(b)s and some Individual Retirement Account that ERISA plans had enjoyed thereby making these plans more similar to ERISA plans.

Legislative History

The 2005 bankruptcy bill was actually first drafted in 1997 and first introduced in 1998. The United States House of Representatives approved a version titled the "Bankruptcy Reform Act of 1999" and the Senate approved a slightly different version in 2000. After the differences in the bills were reconciled, Congress passed the "Bankruptcy Reform Act of 2000". President Clinton, however, employed what is known as a "pocket veto" by waiting for the lame-duck congressional session to adjourn without signing the bill, a legislative maneuver tantamount to a veto.

In the years since 2000, the bill was introduced in each Congress, but was repeatedly shelved due to threats of a filibuster from its opponents and because of disagreements over various amendments, including one backed by Senate Democrats that would have made it harder for anti-abortion groups to discharge court fines related to felony convictions.

The increase in Republican majorities in the Senate and House after the 2004 elections breathed new life into the bill, which was introduced in its current form by the chairman of the Finance Committee, Republican Senator Chuck Grassley of Iowa. The bill was supported by President George W. Bush. Tom DeLay also championed the controversial legislation.

In the spring of 2005 a negative savings rate not seen since the Great Depression had begun, and then the new bankruptcy law was passed. The negative savings rate is highest for the children. Legislation requiring Children's income be attached to parents income results in children paying the highest rate of income tax, highest negative savings rate and parent(s) filing for bankruptcy most often.

Criticisms

The 2005 bankruptcy bill was opposed by a wide variety of groups, including consumer advocates, legal scholars, retired bankruptcy judges, and the editorial pages of many national and regional newspapers. While criticisms of the bill were wide ranging, the central objections of its opponents focused on the bill's sponsors' contention that bankruptcy fraud was widespread, the strict means test that would force more debtors to file under Chapter 13 (under which no debts are forgiven) as opposed to Chapter 7 (under which some debts are forgiven), the additional penalties and responsibilities the bill placed on debtors, and the bill's many provisions favorable to credit card companies. Opponents of the bill regularly pointed out that the credit card industry spent more than $100 million lobbying for the bill over the course of eight years.

One of the primary stated purposes of the bankruptcy bill was to cut down on abusive or fraudulent uses of the bankruptcy system. As Congressman F. James Sensenbrenner Jr. (R-Wis), one of the bill's key supporters in the House, argued, "This bill will help restore responsibility and integrity to the bankruptcy system by cracking down on fraudulent, abusive, and opportunistic bankruptcy claims." Opponents of the bill argued that claims of bankruptcy abuse and fraud were wildly overblown, and that the vast majority of bankruptcies were related to medical expenses and job losses. Their arguments were supported by an in-depth study by Harvard University medical and legal scholars, which found that more than half of bankruptcies were attributable to unpaid medical bills.

Perhaps the most controversial provisions of the bill was the strict means test it established to determine whether debtors could file under Chapter 7 of the bankruptcy code. This decision was previously made by a bankruptcy court judge, who would evaluate the particular circumstances that led to a bankruptcy. Critics of the means test, which is triggered if a debtor makes more than their state's median income, argued that it ignored the many causes of individual bankruptcies, including job loss, family illnesses, and predatory lending, and would force debtors seeking to challenge the test into costly litigation, driving them even further into debt.

Besides the stricter means test, opponents of the bill also objected to the many other obstacles the bill creates for individuals seeking bankruptcy protection. These included more detailed reporting requirements, higher fees, mandated credit counseling, and the additional liability placed on bankruptcy attorneys, which critics argued would drive up attorneys fees and decrease the number of lawyers willing to help consumers file. These criticisms have been borne out in the months following the new law, as lawyers have reported that the bankruptcy process has become significantly more arduous, forcing them to charge higher fees and take fewer clients.

The many provisions beneficial to credit card companies were also a major target of the bill's opponents. In particular, critics objected to the extension to eight years from six the time before which debtors could liquidate their debts through bankruptcy, and requirements that those who do file for multiple bankruptcies to pay previous credit card debt that would have been forgiven under the old law.The bill's opponents were especially critical of provisions that prioritize the repayment of credit card debt over unpaid child support, forcing spouses owed alimony to fight with credit card companies and other lenders for their unpaid support. More broadly the bill's critics argued that the legislation did nothing to curtail the predatory practices of credit card companies, such as exorbitant interest rates, rising and often hidden fees, and targeting minors and the recently bankrupt for new cards. The bill's critics pointed out that these practices are themselves significant contributors to the growth of consumer bankruptcies.