There has been a dramatic change in the way bankruptcy is perceived in America. In previous generations, those who declared bankruptcy were often labeled as failures - people who were just not able to pull their own weight in the world. Gradually, this stigma began to fade as the number of people who were forced to file due to circumstances beyond their control multiplied. Unfortunately, this trend also has since turned into a convenient avenue for those seeking a quick escape from their self-indulgent debt.

Congress, hoping to stem the tide of bankruptcy in America, introduced the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which became law on April 20, 2005. This act makes it much more difficult - and expensive - to declare bankruptcy. This article will explore today's tougher bankruptcy rules and their ramifications for both the downtrodden and the deadbeat.

Major Provisions
Current bankruptcy rules have been designed to drastically reduce the number of people who can file bankruptcy, especially under chapter 7. Stricter criteria must now be met before bankruptcy becomes an option to allow those who truly have no financial alternative to gain relief from creditors while attempting to preventing the dishonest, the irresponsible and the lazy from shirking their responsibility to satisfy creditors that they may be capable of paying. (To learn more about bankruptcy, see What You Need To Know About Bankruptcy and Life After Bankruptcy.)

Filers must produce a certificate proving that they are receiving credit counseling and have set up a repayment plan (at their own expense) within 180 days prior to submitting bankruptcy paperwork. Other changes also dictate that in order to qualify for chapter 7, the debtor's income for the last six months must fall below the median income in his or her home state. If these criteria are not met, then a means test will be applied that examines the debtor's tax returns and income to determine whether the debtor would be able to pay off the lesser of $10,000 or 25% of his or her debt over the next five years.

If the test reveals that the debtor will have enough disposable income after basic living expenses to meet this obligation, then approval by a judge must be obtained before a chapter 7 bankruptcy will be awarded. However, only those in unusual or extraordinary situations will be granted this exception. Most debtors with incomes above the mean will be limited to chapter 13 bankruptcy, which does not allow them to escape their debt altogether via sale of assets, but only implements a long-term payment plan, usually over three to five years.

The act now makes it more difficult to conduct serial filings and to claim the unofficially deemed "chapter 20" bankruptcy provision, in which debtors declared a chapter 13 bankruptcy after filing for chapter 7 relief in order to cover both secured and unsecured debts. Both of these scenarios have been made more difficult to achieve by increasing the time between filings; six to eight years for chapter 7 bankruptcies and up to two or three years for chapter 13. For example, an individual who files chapter 7 bankruptcy will not be able to declare chapter 13 to take care of the secure debt for three years.

In order to further limit the use of bankruptcy for abusive purposes, the scope of non-dischargeable debts was expanded to include the following:

  • Debts in excess of $500 made to a single creditor for luxury goods within 60 days of filing
  • Cash advances in excess of $750 within 70 days of filing
  • A wider variety of delinquent taxes
  • Divorce, separation and domestic support obligations
  • Debts incurred to pay fines and penalties
  • Homeowner association fees
  • Retirement plan debts, such as 401(k) loans
  • Reduced sheltering of real estate assets

Is It Working?
One of the main arguments for maintaining some accessibility to filing for bankruptcy is that those who have been laid off or have incurred substantial medical or funeral bills often have no other form of economic refuge. Consequently, working-class debtors with incomes just above the poverty level that incur expenses beyond their means may have just enough income to prevent them from qualifying for bankruptcy, which effectively leaves them with no other form of relief.

Interestingly, when news of the Bankruptcy Abuse Prevention and Consumer Protection Act made its way into the general public, there was a near tidal wave of debtors applying for bankruptcy before the new law took effect. According to statistics from the Administrative Office of the Courts, there were in excess of 2 million non-business bankruptcy filings during 2005 before the new legislation went into effect in 2006 (whereas there were only about 1.6 million filings during each of the previous three years).

Ultimately, there is no foolproof way to effectively screen out all of the abusive filers while granting relief to those who truly need it. While the long-term effects of the new bankruptcy laws may not become visible for some time, the law has reduced the overall number of filers, which was its primary objective. Consumers seeking to avoid paying their personal debt must understand that declaring bankruptcy has become much more difficult and expensive. In many cases, private or independent debt consolidation may be the only relief for which they qualify.