New Bankruptcy Law Summary Of Changes

Motivation behind enactment of new bankruptcy laws leaves debtors in the cold

In 1994 a unprecedented new bankruptcy law changed the landscape of personal bankruptcy forever. The Bankruptcy Reform Act of 1994 (Pub. L. No. 103-394, 108 Stat. 4106) was initially drafted by political action committees funded by MBNA, Citibank, and strongly supported by the Financial Services Round Table (a special interest group comprised of 100 of the wealthiest financial institutions in the U.S.) Each year after 1994, additional reform proposals proliferated upon the calendar's of both the House of Representatives and Senate, yet these proposals were consistently vetoed by President Clinton. Beginning in 2000, with strong support of President Bush, the affluence of political action committees found Republican majorities eager to endorse the latest drafts of the Bankruptcy Abuse Prevention and Consumer Protection Act. See new bankruptcy laws - legislative history for more information.

Effective Date of the New Bankruptcy Laws:

  • The Republican majority in the Senate passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Senate Bill 256) on 03-11-05. All Democrat Senators voted against Senate Bill 256.
  • The Republican majority in the House of Representatives ratified Senate Bill 256 and advanced the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 on 04-14-2005. Additionally, several Democrats endorsed ratification.
  • President George W. Bush enthusiastically signed the proposed new bankruptcy laws on 04-20-05. According to the provisions within Senate Bill 256, the new bankruptcy law amendments became effective 180 days after presidential approval. The new bankruptcy law became effective 10-17-05.

Provisions within the new bankruptcy laws, as passed

Almost all financial providers praise the new bankruptcy laws as the re-establishment of financial prudence. Supporters also claim the traditional Chapter 7 discharge threatened the ability of the largest financial institutions to maintain a stable national banking system. Detractors cited statistical data that filings are caused primarily because of financial emergencies (injury, illness, job loss, and divorce primarily) and are not the result of reckless spending, and questioned the need to bolster creditor rights considering earnings produced by historically high credit card rates and late fees continue producing record profits for lenders each year. A few of the most controversial amendments included with new bankruptcy laws include:

Chapter 7 new bankruptcy laws amended
  • No debtor may file Chapter 7 personal bankruptcy according to new bankruptcy laws governing discharge, if earning in excess of $100/mo. in disposable income (according to the newly defined disposable income test), if the if debtor owes total claims and liabilities below a $24,000 threshold.
  • No individual debtor may file Chapter 7 bankruptcy as provided by the new bankruptcy laws, if earning in excess of $166/mo. disposable income (calculated by the "means test) if total debts and liabilities are above the $24,000 threshold. Past versions of The Code permitted all almost all debtors to file personal Chapter 7 without regard to net income or total claims. See new bankruptcy laws - means testing for more information.
  • In a radical departure from past traditions, the new bankruptcy law creates a rebuttable presumption of "bad faith" against all Chapter 7 debtors, that, in order to avoid sanctions and dismissals, must be overcome as a condition precedent for discharge. For more detail, see new bankruptcy laws - bans on chapter 7.
Chapter 13 new bankruptcy laws
  • Judges no longer determine a reasonable living standard (on a case by case basis) for individuals filing personal Chapter 13 bankruptcy cases. The mew law imposes a National Standard for all debtors. In Chapter 13, all debtors, regardless of circumstance or need, are restricted to scheduled monthly living allowances. In the past, previous Code provisions allowed judges to accommodate disabilities, incapacity, safety needs, and large variations in regional costs of living. See new bankruptcy law monthly living allowances for more information.
  • The new bankruptcy laws eliminate "Cram Down". Today, all debtors filing Chapter 13 bankruptcy must repay the full balance due on secured notes (i.e. auto loans, consumer credit for appliances, etc.) to retain collateral. In the past, collateral retention was allowed if repaying actual value for collateral, with the remaining balance deemed unsecured and subject to discharge at the end of the plan.
  • Debtors filing Chapter 13 cases who earn more than the median income for their state of residency must propose 5 year plans unless all claims and liabilities are repaid in less time. In the past, before the enactment of new bankruptcy laws, three year Chapter 13 plans were allowed even though repaying as little as 10% of total liabilities. and actual collateral value for secured claims. Compare Chapter 13 Payments Before New Bankruptcy Laws to Chapter 13 Payments After New Bankruptcy Laws.
General Provisions within the new bankruptcy laws after reform
  • The new bankruptcy laws further limit judicial discretion, and imposes automatic penalties and sanctions if debtors allege any fact absent "substantial justification". Common mistakes, unintentional errors are not specifically excused. This penalty clause is new, and does not reciprocally apply to creditors.
  • The new bankruptcy laws also impose automatic penalties and sanctions against any attorney representing a debtor if alleging any fact absent "substantial justification". Again, a reciprocal penalty for creditor misrepresentation is not included with in the new Code.