What Is the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)?
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 is a law that revised the United States Bankruptcy Code for cases filed on or after October 17, 2005. It was passed by Congress and signed into law by President George W. Bush in April 2005.
- The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), passed in 2005, is a law intended to reform the personal bankruptcy process in the U.S.
- Under BAPCPA, filing for Chapter 7 personal bankruptcy became more difficult, as more stringent eligibility requirements were imposed.
- The goal was to prevent the bankruptcy process from being abused and to encourage Chapter 13 filings instead of the more forgiving Chapter 7.
- Traditional IRAs and Roth IRAs were given federal bankruptcy protection for the first time under BAPCPA, up to certain limits.
How the Bankruptcy Abuse Prevention and Consumer Protection Act Works
Under Chapter 7 bankruptcy, most unsecured consumer and business debts are forgiven or discharged. This bankruptcy plan also requires the liquidation and sale of certain assets by a designated trustee in order to repay creditors.
Alternatively, bankruptcy filed under Chapter 13 requires debtors to repay a portion of their debt before a debt discharge is considered. Chapter 13 bankruptcy requires debtors to restructure their debts and create a three- to five-year repayment plan, under which they will use future income to pay off creditors in part or in full.
The Bankruptcy Abuse Prevention and Consumer Protection Act was introduced to make it more difficult for debtors to file for Chapter 7 bankruptcy and, instead, force more of them to file for Chapter 13.
The new law created a means test that determines whether individuals filing for bankruptcy can file for Chapter 7 bankruptcy, which discharges many debts in full, or must opt for Chapter 13 bankruptcy, which requires at least partial repayment of debts. Furthermore, the law increased the waiting period from when an individual last filed Chapter 7 bankruptcy to when they may file again, from six years to eight.
Chapter 7 vs. Chapter 13
Essentially, the purpose of BAPCPA was to make it more difficult for higher-income individuals to qualify for Chapter 7 bankruptcy by more closely examining the filer's ability to repay their debts. The means test compares the debtor's monthly income to the median income for a household of their size in their state of residence and provides an allowance for assumed monthly expenses, at rates determined by the IRS, as well as an allowance for actual monthly expenses.
If the individual's income exceeds the median and they have some money left over after accounting for living expenses, they usually will not qualify for Chapter 7 bankruptcy and must proceed under Chapter 13. The income limits can change every year and are based on U.S. Census Bureau data.
To apply for bankruptcy, a debtor must submit either a set of 122A forms for Chapter 7 bankruptcy or 122C forms for Chapter 13 to the bankruptcy court.
BAPCPA also set in place mandatory credit counseling for consumers and businesses looking to file for bankruptcy.
Most studies that have looked into the effectiveness of BAPCPA to reform bankruptcy have concluded that the profile of consumer bankruptcy debtors hasn't changed much since its passage. This suggests that the means test has not led to more high-income debtors providing more payments to creditors. Instead, it may be that those in need are simply delaying seeking bankruptcy relief.
Individuals and businesses that plan to file for bankruptcy must complete an accredited nonprofit credit counseling program no more than 180 days prior to filing.
New Protections for IRAs Under BAPCPA
The enactment of BAPCPA brought about another change: federal protection for individual retirement accounts, or IRAs. Although federal bankruptcy laws have long protected 401(k) plans, traditional pensions, and similar employer-sponsored, qualified retirement plans, before BAPCPA was passed, IRA protections were defined at the state level, or not at all. After the law's passage, people in every state were afforded bankruptcy protection for IRA assets.
Protection under BAPCPA varies, depending on the type of IRA. Traditional IRAs and Roth IRAs are currently protected to a value of $1,512,350, with adjustments for inflation made every three years (the next adjustment is in 2025). SEP IRAs, SIMPLE IRAs, and most rollover IRAs are fully protected from creditors in a bankruptcy, regardless of their dollar value.
How Is Chapter 7 Different From Chapter 13?
Chapter 7 is a type of liquidation bankruptcy, in which an individual's assets are liquidated (sold off by a trustee) to pay their creditors. After that, their remaining debts are discharged. Chapter 13, on the other hand, allows the person to keep more of their assets, but they must agree to a plan to repay their creditors within a certain period, typically three to five years. If they fail to comply with that plan, the court can force them into Chapter 7 bankruptcy.
How Many Types of Bankruptcy Are There?
There are currently six types of bankruptcy available in the United States: Chapters 7, 9, 11, 12, 13, and 15. Chapter 7 and Chapter 13 are the types most commonly used by individuals. Chapter 11 is primarily for businesses, although some individuals may file it, as well. The other types are for more specialized purposes, such as Chapter 9, which municipalities use to file for bankruptcy.
How Does Bankruptcy Affect Your Credit Score
Bankruptcy can do severe damage to an individual's credit score, although its impact will lessen over time. Chapter 7 can remain on a person's credit report for up to 10 years from the date of filing, while Chapter 13 can remain for up to seven years.
The Bottom Line
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more difficult for some individuals to file for Chapter 7 bankruptcy, forcing them to file for Chapter 13 bankruptcy instead. If you're contemplating filing for bankruptcy it is a good idea to consult with a knowledgeable lawyer to find out what your options are.