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New Bankruptcy Law Makes It More Difficult To Go Bankrupt

Disclaimer: The following article meant for reference only, and is not intended to be legal advice. Be sure to consult a lawyer for a full explanation. The Bankruptcy Abuse Prevention and Consumer Protection Act was became effective on October 17, 2005 (except for a few provisions). This amendment to the Bankruptcy Code is a major revision of the 1978 Bankruptcy Code and deals mainly with consumer bankruptcy. It was passed in response to rising bankruptcy filings and is based on a concept of increased personal responsibility. This article offers a very brief explanation of the “means test” that is designed to dump some debtors out of Chapter 7 and into Chapter 13: Most debtors would of course prefer to discharge their debts under Chapter 7 rather than pay into Chapter 13. For debtors with the ability to pay, however, this will not be nearly as automatic as before. Under the previous version of the Bankruptcy Code, a finding of "substantial abuse" had to be made before a debtor was barred from Chapter 7 relief. Under the new law, this standard is reduced to "abuse" (one act of abuse is sufficient rather than “substantial” abuse). Abuse is now presumed for debtors deemed to have the means to pay into Chapter 13. This means test applies to debtors net current monthly incomes greater than their state's median income. The means test has two prongs:

1. If the debtor’s net monthly income after deductions is at least $166.67, the debtor is presumed to be ineligible for Chapter 7 relief.

2. If the debtor’s net monthly income is at least $100 and the debtor is deemed to have the means to pay at least one-fourth of his/her unsecured debt over 5 years, then the debtor is presumed to be ineligible for Chapter 7 relief. What all this means is that debtors who file under Chapter 7 will be forced to pay as much as they can under Chapter 13 if they can afford to unless they can prove that they are not abusing the system by filing under Chapter 7 . The word “presumed” simply means that whatever is presumed will be taken as true unless proven otherwise - the burden of proof has switched to the debtor to prove there is no abuse rather than on the government to prove "substantial abuse" as before.


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