Congress enacted new bankruptcy laws in 2005, known as the Bankruptcy Abuse Prevention and Consumer Protection Act. BAPCPA has made filing requirements complex and costly. Today, all debtors are required to obtain credit counseling through an approved agency and repay a portion of debts under Chapter 13.
The new bankruptcy laws were created to protect consumers against predator lending and prevent consumers from engaging in frivolous spending habits and having debts discharged under Chapter 7. However, the strict guidelines can impede debtors who require debt relief caused by long-term unemployment or overwhelming medical expenses.
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Filing personal bankruptcy was a straightforward process prior to BAPCPA. Many debtors obtained debt help by filing Chapter 7. This bankruptcy chapter allows debtors to liquidate assets to repay creditor debts. Remaining balances are discharged and debtors are given a fresh start.
Today, debtors are required to file Chapter 13 and establish a payment plan. The exception to the rule is if debtors earn less than their states' median income. BAPCPA utilizes a tool known as the 'means' test to determine the amount of debts which must be repaid. Individuals whose earnings exceed state median income levels are required to file Chapter 13, while those earning less may qualify for Chapter 7.
Chapter 13 payment plans generally last between 2 and 3 years. Debtors must submit payments to the U.S. Trustee who distributes payments to creditors. During the payment plan, debtors are prohibited from taking on new debt without court authorization.
If debtors do not adhere to their Chapter 13 payment plan, creditors can petition the court seeking dismissal. When bankruptcy petitions are dismissed, debtors fail out of bankruptcy and lose court protection. Creditors can commence with collection actions including foreclosure, repossession of property, and wage garnishment.
Debtors must submit a credit counseling certificate through the court before bankruptcy approval is granted. BAPCPA requires debtors to obtain credit counseling through a U.S. Trustee approved agency. Individuals considering personal bankruptcy should consider obtaining credit counseling prior to submitting their petition. Oftentimes, credit counselors can help debtors negotiate debt levels or develop a suitable payment plan which can eliminate the need for filing bankruptcy.
It is best to enter into credit counseling with an agency approved by the U.S. Trustee. If debtors are unable to obtain debt relief through counseling they will have met BAPCPA requirements and will not be required to undergo the process again. Individuals can enter into credit counseling up to 6 months prior to submitting a bankruptcy petition.
Debtors should also take time to research bankruptcy alternatives such as budgeting, debt settlement, or debt consolidation. The alternatives may provide the same result without the long-term consequences associated with bankruptcy.
In addition to having a black mark on credit reports for up to 7 years, debtors can witness a drastic decline in credit scores. This often places debtors into a lower credit category and can prevent them from obtaining credit of any kind for several years. Those who do qualify for lines of credit will be required to pay much higher interest rates.
Individuals considering bankruptcy should seek counsel from a qualified lawyer and carefully weigh the advantages and disadvantages. The long-term effects can trouble debtors for years to come. However, if debtors adhere to Chapter 13 payments, bankruptcy can help them reorganize debts and retain valuable assets.
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