Bankruptcy Abuse Prevention Act
In April of 2005, the bankruptcy abuse and protection act was passed into law. The act’s initial goal was to make it more difficult for consumers to file for Chapter 7, making more people qualify under Chapter 13 instead.
However, this act doesn’t effectively do what it was passed into law for. Close to four out of five people still qualify to file Chapter 7 bankruptcy, because they can automatically pass a means test.
Since everyone has different amounts of debt, and salary levels, the means tests was created to prequalify consumers for their individual income levels. Although, this act set out to limit the amount of people filing for Chapter 7 bankruptcy, it really hasn’t had much effect.
Based on the gross income of the filer, the means test spans over the last 6 months, prior to filing for bankruptcy. At this point, the filer’s income is compared to the average income throughout their home state. If his or her income is lower than the median income, the consumer automatically is able to qualify for Chapter 7 bankruptcy.
Another way this process can be calculated is by looking at the consumer’s DMI, or disposable monthly income. If the filer’s DMI is below $100 a month, they qualify to file for Chapter 7 bankruptcy. Otherwise, they need to file for Chapter 13.
The main take away from this act is the fact that consumers are now required to do two things. They must undergo mandatory financial counseling, as well as incur additional filing fees that used to be covered. (ie, lawyer’s fees) If you’re a small business, you’ll also find yourself with an increased amount of debt repayment, compared to before this law was passed.
However, this act doesn’t effectively do what it was passed into law for. Close to four out of five people still qualify to file Chapter 7 bankruptcy, because they can automatically pass a means test.
Since everyone has different amounts of debt, and salary levels, the means tests was created to prequalify consumers for their individual income levels. Although, this act set out to limit the amount of people filing for Chapter 7 bankruptcy, it really hasn’t had much effect.
Based on the gross income of the filer, the means test spans over the last 6 months, prior to filing for bankruptcy. At this point, the filer’s income is compared to the average income throughout their home state. If his or her income is lower than the median income, the consumer automatically is able to qualify for Chapter 7 bankruptcy.
Another way this process can be calculated is by looking at the consumer’s DMI, or disposable monthly income. If the filer’s DMI is below $100 a month, they qualify to file for Chapter 7 bankruptcy. Otherwise, they need to file for Chapter 13.
The main take away from this act is the fact that consumers are now required to do two things. They must undergo mandatory financial counseling, as well as incur additional filing fees that used to be covered. (ie, lawyer’s fees) If you’re a small business, you’ll also find yourself with an increased amount of debt repayment, compared to before this law was passed.
