What is Bankruptcy?

The concept of bankruptcy – a fresh start from financial burdens – has been part of U.S. law since its inception. Article I of the U.S. Constitution empowers Congress to enact bankruptcy laws. In the mid- to late 19th century, bankruptcy laws were enacted to protect businesses from their creditors. Then, the Bankruptcy Reform Act of 1978 rebuilt the U.S. bankruptcy system from the ground up.

What is BAPCPA?

The last major Congressional overhaul was the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). This legislation was designed to curb perceived consumer abuses of Chapter 7 debt discharges by incorporating a means test as part of Chapter 7 eligibility. Specifically, Chapter 7 bankruptcy is typically no longer available to consumers who have incomes above their state’s median income.

BAPCPA liberalized the ability for a court to deny a Chapter 7 claim, and allowed a bankruptcy court to convert a Chapter 7 petition (debt discharge) to a Chapter 13 petition (debt repayment plan). In addition, the law lengthened by two years (from six years to eight years ) the amount of time between two Chapter 7 bankruptcies.

The 2005 law also enacted a requirement that a consumer participate in credit counseling prior to filing for bankruptcy, and that they attend a personal financial management class. BAPCPA also introduced limitations in certain cases to provisions of the law that prohibit creditors from trying to collect on a debt once a bankruptcy petition has been filed – called automatic stays. Further, the law protected creditors by designating that certain charges made within 60 days of filing bankruptcy were considered bankruptcy fraud and were not dischargeable.

What Does Filing for Bankruptcy Do?

If you file for bankruptcy, it does three things. First, it prevents debt collectors and creditors from contacting you while your bankruptcy petition wends its way through the court system. This can prevent further harassment and abuse. Second, it can either wipe out most debts immediately (via Chapter 7) or provide an income-based repayment plan that will wipe out your balances after you fulfill the repayment terms (Chapter 13). Finally, it gives you the clean slate that you need in order to begin rebuilding your finances and your future.