Issue of Interest: Bankruptcy

ABA Media Contact: Jeff Sigmund
(202) 663-54739
Email: jsigmund@aba.com
Last updated: November 25, 2013

Summary

As amended by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005, the U.S. bankruptcy system now includes a needs test for debtors that can afford to pay at least a portion of their outstanding debts.  The needs test compares income and expenses to determine whether a higher-income filer can afford to repay a significant portion of their debts through a Chapter 13 repayment plan.  If the needs test finds that a higher-income debtor can't afford a repayment plan, then their debts are fully discharged.  All filers who earn less than their state's median income - an estimated 80 percent - are exempt from the needs test.  These debtors will receive a full financial fresh start through Chapter 7 bankruptcy.

Bankruptcy reform was designed to eliminate abuse and ensure that the system is used fairly.  Prior to bankruptcy reform, some higher-income filers had used bankruptcy under the old system as a financial planning tool, escaping from debts that they could afford to repay.  Filers are now required to prove their income with a current tax return or pay stubs, helping to eliminated abusive filings where debtors did not accurately disclose their income.

All debtors will be required to receive credit counseling before filling for bankruptcy.  Congress enacted this requirement to ensure that filers are aware of their non-bankruptcy options before choosing bankruptcy.  In addition, the credit counseling and financial education requirements will help people avoid in the future the financial missteps that first led them to bankruptcy.

The decision to file for bankruptcy protection should not be taken lightly.  It is not an easy way out of debt problems and it has serious consequences.  Non-profit consumer credit counseling services are available in most communities and can often help troubled borrowers avoid bankruptcy.  Bankruptcy stays on a person’s credit record for up to 10 years. Those who file are likely to have trouble getting a loan or rental agreement and may be required to pay a higher interest rate or find a co-signer who will promise to repay the loan in case of default.

Resources

American Bankruptcy Institute: http://www.abiworld.org/
ABI is the largest multi-disciplinary, non-partisan organization dedicated to research and education on matters related to insolvency.

The Association of Independent Consumer Credit Counseling Agencies: http://www.aiccca.org/
The AICCCA is a member-supported national association representing non-profit credit counseling companies that provide consumer credit counseling, debt management, and financial education services.

Executive Office for U.S. Trustees: www.usdoj.gov/ust/
Sets standards for credit counseling agencies and financial education courses required by new bankruptcy law. Web site has information on new law's implementation.

U.S. Federal Courts: www.uscourts.gov
Web site contains bankruptcy statistics and basics, information on federal court fees, official bankruptcy forms, and links to district courts across the country.

The Judicial Conference, which promulgates detailed administrative rules and supporting forms for carrying out provisions of the Bankruptcy Code, can be accessed through this site.

Thomas (legislative information on the Internet) http://thomas.loc.gov/
Web site contains the House Judiciary Committee report on the new bankruptcy law. From the home page, click on committee reports, and enter "S. 256" in the bill number box. The report includes the bill language, and research, committee action, and votes that led up to the bill's final passage.

The Office of the Law Revision Counsel http://uscode.house.gov/
Search or download portions of the United States Code, which is a consolidation and codification by subject matter of the general and permanent laws of the United States. Bankruptcy law is Title 11 of the U.S. Code.