What You Need to Know About the 2005 Changes to the Bankruptcy Laws
As you may know, the nation’s bankruptcy laws changed dramatically in October, 2005 with the enactment of the Bankruptcy Abuse and Consumer Protection Act (BAPCPA) of 2005. This new law was the result of over ten year’s and many millions of dollars of lobbying by the banking and credit card industry. Needless to say there is very little in the way of “consumer protection” in this law!
The purpose and intent of the BAPCPA laws was to make Chapter 7 more difficult to file and to push Chapter 13 debtors into 5 year repayment plans. After studying this new law thoroughly for over two years and after filing well over 2000 cases under the new bankruptcy laws, our experience has been as follows:
- the new law’s biggest impact has been on high income debtors. In Tennessee, for example, the median income for a family of 4 is $61,856 (as of February 1, 2008). If your household income is in the $80,000 or $90,000 range, you will have a difficult time fitting into Chapter 7, but you will also find that in a Chapter 13, your budget will be very tight. Our firm can help evaluate whether it makes sense to fight to fit into a Chapter 7, what a Chapter 13 would look like for you and how to create a Chapter 13 that would be feasible for you.
- If your income is below the “median” then many of the more restrictive provisions of the new bankruptcy law will not impact you at all
- there are some obvious errors in the drafting of the new law that we expect will be fixed in coming months. For example, the language of Bankruptcy Code Section 1325(a) and Section 506 leaves silent the question of what happens if you surrender a vehicle in a Chapter 13 when the vehicle is worth less than the debt owed to the vehicle lender. Some appeals courts have ruled that the deficiency balance is wiped out, while others have ruled that the vehicle lender is entitled to collect the deficiency in the Chapter 13 plan.
Currently, the Sixth Circuit (Nashville is in the 6th Circuit) has ruled in favor of creditors - meaning that if you surrender a vehicle worth less than the outstanding debt on that vehicle, the lender can file a claim in your Chapter 13 plan to get paid the deficiency. You can read the 6th Circuit’s decision in the case of Americredit Financial Services v. Long by clicking on the link. When you read this decision note that Judge Merritt calls the infamous “hanging paragraph” of Section 1325 a “Congressional mistake in drafting the revision [to the bankruptcy laws]” and opines that “we believe that this gap should be filled and the Congressional mistake corrected.”
If you are not familiar with reading Federal Circuit Court of Appeals opinions, this type of explicit rebuke of Congress is unusual and it reflects the frustration that the 6th Circuit judges have with the poor wording of the new bankruptcy law. Judge Merritt’s calling out of Congress is a clear signal to legislators that this issue needs to be corrected.
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