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Changes affecting business
October 2005

Overview

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 became law in April 2005, but many provisions did not go into effect until October 17, 2005. The Act was passed after years of Congressional wrangling and with significant pressure from banks, credit card and retail companies. The loss these industries incur as a result of consumer bankruptcies has been estimated at upwards of $3 billion annually.

The Act has imposed some considerable changes on the Bankruptcy Code in what has been titled the "needs-based" bankruptcy reform. The main purpose for the changes--the first major revision since the late 1970s--is to curb abuse of Chapter 7 bankruptcies, which allows debtors to discharge their debts. In the 2005 Act, an income-based test or "means test" has been implemented to force consumers capable of debt repayment into Chapter13 bankruptcy and repayment schedules instead of allowing them to obtain a complete discharge of debt under Chapter 7 .

The changes to the bankruptcy code affect any debtor having a current monthly income greater than the median income under the new means test. A presumption of abuse is created if a debtor's current monthly income, reduced by the allowable expenses and other factors, is enough to repay some of the debt over a three to five-year period. In these cases, debtors will be required to file under Chapter 13.

The Act also implements other significant changes affecting consumer bankruptcies. Highlights of key changes impacting business are also included in this issue.