This year marks the ten year anniversary of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, a major piece of legislation that overhauled the bankruptcy code throughout the United States. This Act was designed to make it harder to file for bankruptcy by imposing new regulations and stricter requirements for any individual or business attempting to file for bankruptcy.
Though nearly a decade has passed, the incredibly complex regulations imposed by BAPCPA are anything but common knowledge. In fact, many families facing the possibility of bankruptcy are stunned to find out just how complicated this process can be. Here’s what you need to know about the evolution of bankruptcy law in the U.S. and Colorado, and what these changes might mean for you.
Pre-2005 Bankruptcy Laws: Chapter 7 vs. Chapter 13
The purpose of the Bankruptcy Abuse Prevention and Consumer Protection Act was to prevent individuals and businesses from using bankruptcy as a “get out of jail free” card to avoid paying debts. Banks, credit card companies, and legislators believed that bankruptcy abuse was such a widespread and serious problem that it could only be addressed by overhauling the whole system. The BAPCPA of 2005 succeeded in doing exactly that.
Before this Act, individuals of any income level were allowed to file for Chapter 7 bankruptcy, otherwise known as “straight” bankruptcy. Chapter 7 bankruptcy filings are designed to give you a clean financial slate. Under this type of bankruptcy, you aren’t required to repay unsecured debts, which include medical bills and credit card debts. Additionally, all attempts to collect these debts must stop once you file for Chapter 7 bankruptcy, so you’ll immediately stop receiving harassing phone calls from debt collectors.
Chapter 13 bankruptcies—the only other type available to individuals, as opposed to small business and corporations—work a little differently. This type of bankruptcy is often referred to as “reorganization.” Instead of forgiving unsecured debt, a trustee is appointed to work with your creditors to develop a 3-5 year repayment plan. While debts are often consolidated and lessened under this type of bankruptcy, debtors are still required to pay off a percentage of what they owe to credit card companies and other holders of unsecured debts.
There have always been pros and cons to both types of bankruptcy filings—for example, Chapter 13 filings give you a better chance of keeping your assets, while Chapter 7 usually involves forfeiting all but the bare minimum of what you own. But before the BACPCA was passed, Chapter 7 bankruptcies were relatively simple to file and available to anyone. Some families were even able to successfully file for bankruptcy without the help of an attorney. Since 2005, however, all of that has changed.
Means Tests and Credit Counseling: How BACPCA Changed the Game
The Bankruptcy Abuse and Consumer Protection Act instituted many new rules and restrictions, but its most wide-reaching effects came from the creation of a “means test” to determine eligibility for Chapter 7 bankruptcy filings.
Under the new federal rules imposed under the BACPCA, Chapter 7 bankruptcy filings are only available to families whose “presumed income” falls below 150% of their state’s poverty level. In Colorado, however, the means test focuses specifically on whether your income falls above or below the state’s median income for a family of your size. Presumed income, which is still the standard used today, is calculated based on a family’s average income over a period of six months. The income is “presumed” because the average calculated may significantly differ from a family’s actual income.
The median income for a single individual in Colorado currently falls at $47,361; for a family of three, the median income increases to $69,252. Once exemptions and expenses for essentials such as childcare and transportation are subtracted from your overall income, whatever’s left over determines the type of bankruptcy for which you are eligible. If this amount falls above the median income for your family, you are most likely not eligible for Chapter 7 bankruptcy and will likely have to file for Chapter 13 bankruptcy instead.
Presumed income is the result of a complicated equation that depends on how many of your assets are considered exempt from forfeiture during bankruptcy. Colorado’s exemption rules are especially numerous and complex. Since exemptions are limited to those defined by the state, many of Colorado’s rules differ from the federal Bankruptcy Code. These rules even vary from county to county—which is one reason why it’s so important to receive good legal counsel if you’re considering filing for any type of bankruptcy.
Additionally, because of the Bankruptcy Abuse and Consumer Protection Act of 2005, all debtors are required to undergo credit counseling before filing for either type of bankruptcy. You will also be required to complete a financial management class after your bankruptcy case has been resolved, regardless of whether you file for bankruptcy under Chapter 7 or Chapter 13.
While the means test and credit counseling mandates were the biggest changes to the bankruptcy code, BACPCA also instituted a wide range of new restrictions and deadlines with harsher penalties than before. Most general law practitioners aren’t familiar with the complicated requirements set for by this act, which is why it’s critical to seek out specialized legal advice.
Continuing Changes
Though there aren’t any major overhauls of Colorado’s bankruptcy laws anticipated in the near future, it’s important to stay on top of small procedural changes that could easily cause your case to be dismissed. Deadlines, court fees, and other administrative details are complex and ever-changing, which is one reason why it’s crucial to have an experienced bankruptcy attorney help you navigate this process.
Here’s an example: just last September, a new rule took effect mandating that all court fees must be paid via cashier’s check, money order, or exact cash. Credit or debit cards will not be accepted, nor will the Clerk’s Office make change. This may seem like a minor changes that wouldn’t impact the overall success of your case, but the truth is that failure to pay court fees on time and in the correct manner is one of the most common reasons bankruptcy cases get dismissed in Colorado.
What Bankruptcy Law Changes Mean for You
Whether you’re seeking a Chapter 7 or Chapter 13 bankruptcy, it’s more important than ever to enlist the help of a bankruptcy attorney with in-depth knowledge of both the 2005 BACPA changes and Colorado procedural changes that occur from year to year. Experienced legal counsel will not only make sure you meet the many complex requirements for each case; they’ll also help determine which type of bankruptcy is right for you, and work with you to achieve the most favorable outcome possible for your case.
The fact of the matter is, 81% of the bankruptcy cases that failed in Colorado in 2006 were dismissed because the filers didn’t work with an attorney to navigate this complex process. Don’t let the court’s ever-changing rules deny you and your family the opportunity for a fresh start. Call our offices at 303-741-2354 to find out how our specialized bankruptcy team can help you and your family receive the best possible outcome for your bankruptcy case.
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Sources Consulted:
Eric L. Nesbitt, Esq.
Law Offices of Eric L. Nesbitt, PC
Phone 303-741-2354
Email Us
Nesbitt Law Offices Website