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Understanding the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

7 March, 2011



The last option that most financially troubled people choose to work with is bankruptcy. Bankruptcy is a thing which helps the person to get rid of huge debts, but it also leaves black marks on his/her financial history and limits him/her in achieving full financial freedom. Understanding bankruptcy might be a difficult thing for many people and one possible reason for it is its strict conditions.

Not all people are in genuine need of filing for bankruptcy, most people misuse bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made bankruptcy more difficult by implementing new alterations in the procedure of filing for bankruptcy. According to new laws, more strict requirements are now applied, thus making it more complicated and expensive for consumers.

What are the New Changes That Have Been Made By BAPCPA?

A number of changes have been made in the processing practice of filing for bankruptcy; however, we are going to highlight only some of these.

1. Means Test is Compulsory

According to new laws, customers must pass the means test in order to file Chapter 7 bankruptcy; this type of bankruptcy eliminates all debts at one time. The purpose of this means test is to ensure that customer is not abusing the bankruptcy usage by avoiding paying off debts which they afford to pay.

2. What Happens If Customers Fail In Means Test?

If customers fail in means test then it means they can pay off the debts. In this case they have to file for Chapter 13 bankruptcy.

In this type of bankruptcy all debts are subjected to repay over a period of five year.

3. Consumer Credit Counseling

Consumer credit counseling is compulsory for all the customers who are filing for bankruptcy. They are required to attend this counseling six months before filing bankruptcy. They are required to take this counseling from an accredited credit counseling agency.

4. Consequences of New Changes

The American Bankruptcy Institute reported that after the implementation of this altered law, bankruptcy filings went down significantly. In 2006, the total number of bankruptcy filings was 617,660 which were 70% lower from the figures of 2005 filings.

The new strict filing requirements for bankruptcy have increased the customers’ inclination towards Chapter 13 bankruptcy. In the year 2005, before the incorporation of BAPCPA new laws, Chapter 13 bankruptcy filings were sharing only the 20% of the total filings. After the implementation of changes, figures for Chapter 13 bankruptcy filings raised to more than 40% of the total filings.

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by Gemma Maddock



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