Bankruptcy Abuse Prevention and Consumer Protection Act: Overview

What Is the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)?

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 is a law that revised the United States Bankruptcy Code for cases filed on or after October 17, 2005. It was passed by Congress and signed into law by President George W. Bush in April 2005.

How the Bankruptcy Abuse Prevention and Consumer Protection Act Works

Under Chapter 7 bankruptcy, most unsecured consumer and business debts are forgiven or discharged. This bankruptcy plan also requires the liquidation, or sale, of certain assets by a designated trustee in order to repay creditors.

Alternatively, bankruptcy filed under Chapter 13 requires debtors to restructure their debts and create a three- to five-year repayment plan, under which they will use future income to pay off creditors in part or in full, under the supervision of a trustee.

The Bankruptcy Abuse Prevention and Consumer Protection Act was introduced to make it more difficult for debtors to file for Chapter 7 bankruptcy and, instead, force more of them to file for Chapter 13.

The new law created a means test that determines whether individuals filing for bankruptcy can file for Chapter 7 bankruptcy, which discharges many debts in full, or must opt for Chapter 13 bankruptcy, which requires at least partial repayment of debts. Furthermore, the law increased the waiting period from when an individual last filed Chapter 7 bankruptcy to when they may file again, from six years to eight.

Chapter 7 vs. Chapter 13

Essentially, the purpose of BAPCPA was to make it more difficult for higher-income individuals to qualify for Chapter 7 bankruptcy by more closely examining the filer's ability to repay their debts. The means test compares the debtor's monthly income to the median income for a household of their size in their state of residence and provides an allowance for assumed monthly expenses, at rates determined by the IRS, as well as an allowance for actual monthly expenses.

If the individual's income exceeds the median and they have some money left over after accounting for living expenses, they usually will not qualify for Chapter 7 bankruptcy and must proceed under Chapter 13. The income limits can change every year and are based on U.S. Census Bureau data.

To apply for bankruptcy, a debtor must submit either a set of 122A forms for Chapter 7 bankruptcy or 122C forms for Chapter 13 to the bankruptcy court.

BAPCPA also set in place mandatory credit counseling for consumers and businesses looking to file for bankruptcy.

Most studies that have looked into the effectiveness of BAPCPA to reform bankruptcy have concluded that the profile of consumer bankruptcy debtors hasn't changed much since its passage. This suggests that the means test has not led to more high-income debtors providing more payments to creditors. Instead, it may be that those in need are simply delaying seeking bankruptcy relief.

New Protections for IRAs Under BAPCPA

The enactment of BAPCPA brought about another change: federal protection for individual retirement accounts, or IRAs. Although federal bankruptcy laws have long protected 401(k) plans, traditional pensions, and similar employer-sponsored, qualified retirement plans, before BAPCPA was passed, IRA protections were defined at the state level, or not at all. After the law's passage, people in every state were afforded bankruptcy protection for IRA assets.

Protection under BAPCPA varies, depending on the type of IRA. Traditional IRAs and Roth IRAs are currently protected to a total value of $1,512,350, with adjustments for inflation made every three years (the next adjustment is in 2025). SEP IRAs, SIMPLE IRAs, and most rollover IRAs are fully protected from creditors in a bankruptcy, regardless of their dollar value.

The Bottom Line

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more difficult for some individuals to file for Chapter 7 bankruptcy, forcing them to file for Chapter 13 bankruptcy instead. If you're contemplating filing for bankruptcy it is a good idea to consult with a knowledgeable lawyer to find out what your options are.