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Bankruptcy Abuse Prevention and Consumer Protection Act


By Graham Billings on August 24, 2010

The Bankruptcy Abuse Prevention and Consumer Protection Act is a law that was passed in 2005 to make it harder for certain debtors to file for Chapter 7 bankruptcy. Part of the reason for this law was to decrease abuse of the system and make Chapter 7 bankruptcy primarily for low-income debtors, as it was intended, and not allow as many high-income debtors to file for it.

To do this, the law established a means test for Chapter 7 filings. Now, it became possible for people to be blocked from filing for Chapter 7 if it is found that they should be able to pay off their debts. The means test only applies for anyone who earns over the median income for their state, so everyone under the median is safe from being examined for abuse. Everyone above the median income must compare their income to their expected living expenses, and if it is shown that they should have enough money to pay off their debts, then they are no longer allowed to file for Chapter 7 bankruptcy.

The new bankruptcy law changed several more aspects of the bankruptcy process. Before filing for bankruptcy, debtors must now complete credit counseling with an approved agency, and debtors filing for Chapter 13 bankruptcy must complete a financial management class as well. In addition, the law overruled some more lenient laws – for instance, the law limited the use of automatic stays and capped the amount of homestead protection.

While the new bankruptcy law may sound harsh, it is mainly to reorganize the bankruptcy process to better fulfill its intended goal of helping those who truly need it. Before the law, there were loopholes that allowed debtors to move assets around to more lenient states to receive an unfair amount of protection. Still, the law restricts the opportunities of all debtors, and as a result was met with a lot of criticism from consumer advocacy groups. Regardless, it is important to understand the new bankruptcy laws to be able to be informed about potential options when filing for bankruptcy.
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