August 2005
Volume 1, Number 4
Table of Contents

A Primer on Sweeping Bankruptcy Reform
By Marc Stern

On April 20, 2005, President Bush signed the Bankruptcy Abuse Reduction and Consumer Protection Act into law. This act has engendered a number of acronyms, BAPA, BACA, and, my personal favorite, the Bankruptcy Abuse Reform Fiasco or BARF. A blacklined, hyperlinked version of the bill may be found at A downloadable pdf of the bill may be found at Some of the act’s changes became effective when the bill was signed; the majority of the changes will be effective as of October 17, 2005. Both websites have charts showing the different effective dates of the various sections.

This act is the most sweeping bankruptcy system reform since 1978, substantially effecting every chapter of the bankuptcy code. Of the changes, the “means test” was the most discussed and has received the most media attention. In a nutshell, the means test differentiates debtors into two categories - those above and those below the state’s median income. The inquiry ends if the debtor falls below the state’s median income. If the debtor’s median income is above the line, the debtor’s actual expenses are compared against the IRS standards for the city in which the debtor lives. There are then further deductions for payments to secured and priority debts, and other specified items. If the debtor still has a surplus, the filing is presumed abusive and the debtor is supposed to file a Chapter 13.

Whether the means test will have its intended effect is a substantial and untested question. What is clear is that the calculations necessary to make these determinations are substantial. In the future, bankruptcy filings will be much more complex and time consuming. In addition to adding to the complexity of the filing, Congress changed the role of the attorney in the bankruptcy process. The new code implements a series of requirements upon the debtor’s attorney to insure the accuracy of schedules. Section 102 of the Act (codified in Section 707) requires the attorney to conduct a reasonable investigation into the circumstances giving rise to the bankruptcy, and sanctions the attorney if, “after inquiry,” the attorney files schedules that are materially false. Unfortunately, this leaves the bar community with little certainty. There are 3 different tests arguably using 3 different standards. If you are going to represent parties in bankruptcy proceedings, you should be aware of these substantial changes. Contrary to popular belief, there is some indication that increased liability for incorrect statements will also effect creditors’ lawyers.

The act also creates a new class, the “assisted person.” An assisted person is one with less than $150,000 of non-exempt property - not equity in the non-exempt property, just property. Anyone giving bankruptcy advice (with certain exceptions) must identify themselves as follows: “A debt relief agency. We help people file for bankruptcy,” or something similar. This arguably means that a family law attorney telling his client, “I don’t do bankruptcy, have no idea what it is about, but you should see a bankruptcy lawyer,” or a creditor saying, “I don’t care, file bankruptcy, your debt is not dischargeable,” is a debt relief agency and must make the required disclosures. The new bankruptcy act also places strict, specific requirements on the attorney representing the assisted person, prohibiting certain types of legal advice that you can not give the assisted person. It requires complicated record keeping and also requires a written retainer agreement with statutory language.

Next, the act adds new classes of debt not entitled to discharge, including property settlement. In the past, property settlement obligations were dischargeable in Chapter 7 if not objected to. This is no longer the case and remain dischargeable in Chapter 13.

The Act also completely changes Chapter 13. Debts that were previously dischageable in Chapter 13 (but not Chapter 7) are, with certain exceptions, not dischargeable in Chapter 13. There are different standards for disposable income in Chapter 13. Repayment of loans to 401(k) plans is not counted as disposable income. Contributions to retirement plans are also not counted for Chapter 13 purposes. Timelines for confirmation of plans are substantially shortened. Stripdown of secured liens is limited to replacement value without regard to two of the Rash factors. The failure to include additional factors means that the valuation is still subject to dispute. There are further limitations on strip down.

There are also major changes to the law of exemptions and homestead, and should be an area of focus and study because the new provisions are complex. For example, the look back period for determining which exemptions to use is much longer.

Chapter 12 has been permanently reenacted. The debt limitation has been changed and has been extended to Family Fishermen. The percentage of income from fishing or farming operations has been decreased from 80% to 50%.

Some of the lesser-known changes can be found in Chapter 11. Small businesses, another defined term, must file a plan within 6 months. Other Chapter 11 cases must propose a plan within 18 months. In the new act, landlords and utilities get substantial relief. The debtor must assume or reject the lease within 120 days. That time may be extended once for 90 days and may not be extended again without the consent of the lessor. Utilities are entitled to adequate assurance of future performance, probably in the form of cash or a bond.

This article highlights just a few of the substantial changes that arise out of the Bankruptcy Abuse Reduction and Consumer Protection Act. Once the amendments become effective, what we once thought of as bankruptcy practice will change forever.






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