The Bankruptcy Act of 2005

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect on October 17, 2005, making major changes to the United States Bankruptcy Code. The purpose of the reform was to reduce the number of bankruptcies filed, reduce the cost of bankruptcy to the national economy, reduce bankruptcy abuse, and require debtors to repay their debts if they have the means to do so.

Credit Counseling

• The Act requires individuals who want to file for bankruptcy under chapter 7 or chapter 13 to participate in credit counseling prior to filing. If the counseling agency gives you a repayment plan, you must submit the plan to the court when you file your bankruptcy, along with a certificate showing you completed counseling. You must attend a second counseling session for instruction on financial management before your bankruptcy is granted.

Eligibility for Chapter 7

• Chapter 7 bankruptcy discharges your debt without requiring repayment. This option is now available only to those who meet income requirements. You are automatically eligible for chapter 7 if your income is the same or less than your state's median income for your household size. Individuals whose incomes are above the median must pass a means test to prove that they are unable to pay their debts before being allowed to file under chapter 7.

Chapter 13 Restrictions

• Under chapter 13 bankruptcy, you must set up a repayment plan. Prior law allowed individuals to calculate the income available for repayment based on their actual living expenses. The reformed bankruptcy law requires individuals whose incomes are higher than their state's median income to use only allowed expenses determined by the Internal Revenue Service in calculating income available for making payments. Available income is based on your average income during the six months prior to filing.

Requirements for Attorneys

• In addition to helping their clients comply with more complicated requirements under the 2005 Act, attorneys must also guarantee that the information their clients provide to the bankruptcy court is accurate. Attorney fees for bankruptcy cases have generally gone up as a result of the increased complexity and time requirements for representing bankruptcy clients. FindLaw reports that some attorneys are no longer practicing bankruptcy law because of the new requirements.

Other Changes

• The law now requires you to provide the prior year's federal tax return as proof of income. Some of the protections previously provided by bankruptcy were discontinued under the 2005 law. For example, filing for bankruptcy will not slow or prevent an eviction, suspension of your driver's license or a lawsuit for child support or divorce.