It’s Alive! Chapter 7 Bankruptcy After BAPCPA

Mark Twain once traveled to Europe where he learned that his obituary had been published in the New York Journal. Twain responded by saying that “reports of my death are greatly exaggerated.” After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was signed into law by President Bush an impression developed among the general public that Chapter 7 Bankruptcy was dead. The credit industry encouraged the perception that individuals would no longer be able to discharge their debts, but instead would have to repay at least a portion of them in Chapter 13 cases pursuant to a plan. I am happy to report that reports of the death of Chapter 7 bankruptcy are greatly exaggerated.

In the several months preceding October 17, 2008, when BAPCPA became effective, Chapter 7 bankruptcy filings rose dramatically. Individuals rushed to file their cases under the pre-BAPCPA law. Their fear was they would not be eligible to file under BAPCPA. They also did not wish to be subject to numerous new burdens imposed by the new law, or the increased expense of filing which would surely accompany the implementation of the law. Lundquist Consulting Inc., a California financial research firm that tracks bankruptcy data from the nation’s courts reported 479,430 cases were filed in the week before the October 17 implementation date! In the month after the new bankruptcy law took effect, the number of Americans filing for protection from their creditors slowed to a trickle, running at one-tenth the normal number of filings. Lundquist Consulting reported 3,600 cases were filed in the first month following implementation of BAPCPA. In a normal pre-BAPCPA week, about 30,000 cases were filed.

BAPCPA introduced numerous changes in how individuals file bankruptcy cases and in the procedures to be followed. Elimination of Chapter 7 liquidation was not a change in the new law.

A few of BAPCPA’s major changes to the law are:

Credit Counseling is required before an individual can file a Chapter 7 or Chapter 13 bankruptcy case. The debtor must complete a course on the phone or on-line provided by a vendor approved by the United States Trustee. The course takes approximately 45 to 90 minutes to complete. The course must be taken before the petition is filed, but no more than 180 days prior to filing. A second course, in Financial Management, must be taken before a discharge will issue.

Debtors must now provide copies of federal tax returns from the last year filed to the Trustee. Returns from previous years must be filed. Copies of pay-stubs or reports for the 60 days preceding the filing must also be given to the Trustee.

The time between filing Chapter 7 bankruptcy cases was changed from six years to eight. Filing a case any earlier will result in no discharge.

Homestead exemptions were capped by BAPCPA at $125,000, unless the debtor has owned the property for more than1215 days in which case the state’s homestead exemption amount will apply without limitation. The Massachusetts Homestead limit is $500,000.00.

A debtor must live in a state for the 730 days prior to filing bankruptcy to be entitled to claim that states exemptions. The state the debtor was domiciled in the most in the period from 730 days to 910 days ago is the state whose exemptions can be used.

Cash advances totaling more than $750 on a credit card within 70 days of filing are presumed to be non-dischargeable. In addition, charges of luxury goods or services totaling more than $500.00 on a credit card within 90 days of filing are presumed non-dischargeable.

A Median Income/Means Test is implemented to determine eligibility for filing a Chapter 7 case. The Median Income Test allows debtor’s whose Current Monthly Income (CMI) is less than their state’s median income for their household size, to file Chapter 7 bankruptcy. CMI is the average gross monthly income for the preceding six calendar months before filing. For example, a June 16 filing would use income from December 1 to May 31. CMI includes income from all sources except Social Security and most likely unemployment. The test has nothing to do with what the debtor is actually earning. The debtor might be unemployed and earning zero at filing, but his CMI could be very high if he were employed the preceding six months. In Massachusetts the median income for a household of one is $51,176.00, for a household of two is $61,293.00, for a household of three is $75,801 and a household of four is $89,347.00. Implementation of this means test is what the credit industry believed would create a reduction in Chapter 7 bankruptcy filings. If the debtor’s income exceeds the median income for his state and family size, the debtor must perform a Means Test to determine his disposable net income (DNI). Allowable expenses (most of which are from the IRS Collection Standards) are subtracted from CMI. If the resulting DNI is less than $100.00, the debtor can file Chapter 7 bankruptcy. If DNI exceeds $166.66, the debtor probably cannot file a Chapter 7 case. DNI between these to amounts will allow a Chapter 7 filing if the DNI amount is less than 25% of non-priority unsecured debt. If a debtor fails both the Median Income and Means Tests, there is a presumption that the filing of a Chapter 7 case is an abuse.

In my experience as a Massachusetts bankruptcy law lawyer over the last three years, the majority of clients that could have filed their Chapter case under pre-BAPCPA law can still file them under post-BAPCPA.

Reaffirming Car Loans in Massachusetts Bankruptcy

In 2005, Congress passed the “Bankruptcy Abuse Prevention Act” otherwise known by the acronym “BAPCPA”. Under BAPCPA, Massachusetts debtors have three options allowed by federal law in regard to their car loans. The first is to surrender their automobile. Returning the vehicle to the lender relieves the debtor of any further responsibility for the debt after the debtor’s discharge issues. For many people this is not an option. Most people need their vehicle for transportation to and from work, and to manage normal household errands. A second allowed option is to reaffirm the car loan. Reaffirming a loan requires signing a document called a Reaffirmation Agreement. Reaffirmation Agreements make the debtor permanently liable for the car loan. The bankruptcy discharge will offer no protection from collection on the reaffirmed loan. Therefore, if payments become unmanageable, or the debtor chooses no longer to pay the loan for any other reason, the lender may repossess the vehicle and then sue for the balance still owed. Because Reaffirmation Agreements impose a burden on the debtor’s fresh start in bankruptcy they require approval of the Court. A third option is to redeem the vehicle, which is to pay the lender the value of the collateral. This option is rarely realistic.

Another option, called retain and pay, would allow debtors to keep the car and simply keep making their payments. If the payments remain current, then the debtor can keep the car without the onerous liability afforded by the Reaffirmation Agreement. Under this choice, if the debtor fell behind in payments on the car loan and the vehicle was repossessed, the debtor would not be personally liable for any deficiency. Retain and pay is not an option recognized in the First Circuit of which Massachusetts is a part. If retain and pay is claimed, a creditor may challege it.

Fortunately, Massachusetts residents may have a trump card to help with this conundrum. Massachusetts General Laws, Chapter 255B, Section 20A seemingly prohibits repossession of motor vehicles for a non-monetary default. For Massachusetts debtors current in their payments, this law may provide an avenue to keep their vehicle by keeping their payments current without reaffirming the loan. While a creditor might obtain relief from the bankruptcy stay to repossess such a vehicle, state law would then seem to bar that repossession. Coupled with the Massachusetts Consumer Protection Statute, Massachusetts General Laws Chapter 93A, this statute can be a tremendous asset to the debtor. The debtor’s argument under the statute is the vehicle is worth the same today whether or not a bankruptcy case was filed. The filing did not diminish the vehicle’s value, the payments are current and therefore no repossession can occur.