History of BAPCPA
The Bankruptcy Abuse Prevention and Consumer Protection Act (hereinafter will be referred to as BAPCPA) was signed into law on April 20, 2005, by President G.W.Bush. BAPCPA can be described as the leading revamp to the bankruptcy code in the last 25 years in the legal annals of the USA. BAPCPA makes it difficult for individuals to set free of all of their debt under Chapter 7 by mandating credit counseling, increasing the cost of bankruptcy, demanding debtors to pass an income means test as a prerequisite to relief under the act. (Rodriguez 65).
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Bankruptcy laws in the USA have a long history. The earliest federal bankruptcy law was enacted in 1898 or Nelson Act. This act offered honest debtors subjugated by the saddle of huge debts a fresh start. Before this, states had their laws, which prohibited the creditor to collect their debts from insolvent and offered for restricted discharge of debts.
The essence of the clean slate doctrine was first established in the Supreme Court case namely Local Lean v. Hunt. In this case, the judge accepted the principle of assignment of future wages by a debtor to a creditor as equal to the surrender of property rights and personal liberty. In 1978, Congress repealed the 1898 Act by enacting the Bankruptcy Code.
The Bankruptcy code augmented the advantages for individual debtors and reiterated a right of a debtor to a clean slate. However, the new legislation BAPCPA is taking away the right of an honest debtor for a fresh start. The new law makes it difficult for debtors to start a new life by detracting a debtor’s right to select between a Chapter 13 repayment plan or a Chapter 7 liquidation which symbolizes a turn in popular sentiment that views bankruptcy relief as immoral and cannot be considered as a constitutional right.
BAPCPA introduced a chain of rules intended mainly to compel debtors to come out of Chapter 7 and enter into Chapter 13. There are two tests and one can be seen in Bankruptcy Code § 707(b) (2) and the other is in § 707 (b) (3). The test in § 707 (b) (3) is commonly known as common sense, the totality of the circumstances tests. If Chapter 7 is too better to be true, then the discharge cannot be accommodated.
Bankruptcy Code § 707(b) (2) rules are referred to as the ‘means testing rules “or “abuse testing.” Under this rule, a debtor must have chiefly consumer debt. In other words, it does not apply to business and tax debtors provided their mortgage and credit card debt are not too outsized. (Schriebman, 1102.06).
Immediately, before the enactment of BAPCPA, debtors’ filing reached a record high as filers raced to avoid rigorous bankruptcy legislation. However, in 2006, immediately after the enactment of BAPCPA, individual bankruptcy filings attained a historic low. (Rodriguez, 70).
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Social, Economic, and Political Factors that Shaped this Law
Financial interests like the credit card and mortgage industry spent millions of dollars to see the passage of this law and lobbied expansively.
Although BAPCPA makes filing a bankruptcy considerably more onerous and arduous and shuns some of the advantages that are available after such a filing, the fundamental causes for filing bankruptcy continue. It is to be observed that about twenty-five percent of all bankruptcy cases filed are caused by divorce. Further, divorce is followed by financial strains, and maintaining two households simultaneously on the same level of income is often found to be substantially arduous. Some other social causes of bankruptcy filing include failing business, uncovered medical expenses, and job loss. (Steinfeld 2).
Various economic factors like the subprime mortgage crisis, credit crunch, and the depleting value of commercial leases have shaped the enactment of BAPCPA. The enactment of BAPCPA has reduced the Chapter 11 petitions as only two retailers in the USA have come out successfully from Chapter 11 as restructured entities. For instance, Boscov’s Department Stores and its associates opted for Chapter 11 proceedings during 2008. After protracted negotiation, Boscov could be able to obtain enough DIP funding. Further, in November 2008, the Bankruptcy Court endorsed the sale of debtors as a going concern to erstwhile owners of the Boscov. (Gottlieb, Klein and Sussman, 2009).
I feel that BAPCPA is against the interest of the middle class as it increases the expenditure on bankruptcy filings, requires unwanted documentation, and demands that the creditor should submit himself for credit counseling within 180 days of filing. Thus, under BAPCPA, costs connected with filing any kind of bankruptcy have heightened. However, there is a waiver of filing fees for debtors whose income falls well below one hundred fifty percent of the poverty level. Since BAPCPA requires debtors to take the advice of attorneys before filing bankruptcy, the cost associated with the attorney also rose to a substantial level.
In addition to that, a debtor has to pay for a financial management course and credit counseling. Thus, the augmented cost connected with consumer bankruptcy will have the most brunt on the middle-class society of the USA if it wants to seek relief under Chapter 13. (Rodriguez, 70).
More homeowners started to employ Chapter 13 since it offers them a chance to preserve their homes from foreclosure. Chapter 13 offers an opportunity to default the borrower to suggest a scheme to cure his mortgage arrears over some time while the homeowner can prolong to pay his regular monthly installments as per their mortgage contract. An injunction which is known as “automatic stay “is granted when a defaulting mortgage borrower files for any type of bankruptcy petition.
This automatic stay safeguards the borrower until the plan fails and is dismissed or is completed. One of the disadvantages of the Chapter 13 filing is that in addition to the high counseling and filing fees, the debtor has to repay also mortgage arrears, repayment of unsecured debt, current mortgage payments, and interest. Hence, applicants are deriving lesser advantages under ‘automatic stay’ since they are not able to service their mortgage payments through reschedulement schemes. (Rodriguez, 70).
On the political ground, financial institutions like credit cards, mortgage industries, and creditors associations engaged in strong lobbying which forced Congress to pass the BAPCPA in 2005.
Ostensible Purpose of This Law
Both Republicans and Democrats supported the BAPCPA since they were on the belief that bankruptcy reform was required to symbolize the standards of personal responsibility.
The supporters of this law argued that the considerable increase in bankruptcy filings over the last ten years corroborated the consumer’s abuse of the US bankruptcy code and hence there was a need for the introduction of BAPCPA.
The main object of BAPCPA is to plug the loopholes of state law that permitted opportunistic debtors or wealthy individuals to claim bankruptcy and come out with their debts freed and their assets undamaged.
Opponents were of the view that claims of abuse and fraud were exasperated.
However, both groups never estimated the brunt BAPCPA would have in administering housing-associated risks especially among sub-prime borrowers who are predominantly Latinos and African-Americans.
I feel there is a perceived aim in legislating the BAPCPA, mainly to deny Latinos and African-Americans to have access to wealth, economic stability, and a permanent place in the American middle class.
The ostensible aim for enacting BAPCPA can be explained by the following example:
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Let us assume that O.J.Simpson would file for bankruptcy. Simpson was earlier asked by the court to pay huge penalties for the wrongful deaths of his ex-wife and her boyfriend, Ronald Goldman. Let’s assume that Simpson decided to move to Florida and bought a costly mansion and challenged the Goldman’s to collect on their judgment. The main intention of Simpson is to employ Florida’s unrestricted homestead immunity to safeguard the majority of his assets from his creditor, Goldmans. It is to be recalled that Florida’s state constitution x,§ 4(a) provides an unrestricted homestead exemption that unsecured creditors have no right to reach any equity a debtor has in his home, no matter how valuable the property is.
Further, federal bankruptcy law would have refused Simpson a discharge of his debts. Hence, Simpson decided not to file bankruptcy. This move of Simpson would compel Goldmans to try collection in Florida’s state court.
However, Florida’s liberal homestead exemption permits Simpson to safeguard any claim in his home from creditor reach, and this immunity applies even outside of bankruptcy. Judiciously, thus Simpson devised a strategy to protect all of his assets in property exempted by Florida’s state law. Hence, as of date, the Goldman family is unable to collect even one dollar from Simpson on their judgment. Thus, the morale of the Simpson episode has revealed that denying by wealthy debtors by referring to an unrestricted homestead exemption in bankruptcy proceedings does not connote that creditors will get the house (Alper, 1909).
Alarmed about comprehended infringement of the bankruptcy system and compelled by strong lobbying from creditors association, Congress passed the BAPCPA in 2005. Thus, the main aim of the BAPCPA was meant to plug the loopholes that facilitated opportunistic debtors or wealthy individuals to file for bankruptcy and come out with their debts exonerated and their assets unharmed or in other words, to avert future Simpsons from employing bankruptcy to thwart paying their debts. ( Alper,1910).
Thus, BAPCPA’s key aim is to plug the loophole of unlimited and large exemptions on personal homesteads available in many states as creditors cannot compel or force the disposals of exempt assets. Opportunistic debtor by dubious means will place all his assets in luxurious homes, mainly in states with unrestricted or large homestead exemptions to keep them out of creditors’ arm’s length. (Alper, 1901).
Whether You Believe the Law Achieved Its Objectives
To me, the BAPCPA is having many shortcomings. BAPCPA does not attain the more popular practice of casual bankruptcy, through which insolvent debtors deliberately shun repaying off their debts despite the fact of not filing bankruptcy since creditors find it too costly to collect their debts under state law.
Under erstwhile bankruptcy law, only downtrodden debtors employed informal bankruptcy procedures. However, BAPCPA will hearten opportunistic debtors to employ this tactic as well since the exemption loopholes under the Act are still available under state law. As the result, BAPCPA will fail to restrain bankruptcy exploitation. Though the Act may deny opportunistic debtors to employ formal bankruptcy norms, it cannot compel them to pay back their debts.
Thus, the courts should come forward to plug this loophole by slackening the judicially crafted limitations on inventory bankruptcy, facilitating it easier for creditors to compel opportunistic debtors into formal bankruptcy. (Alpher, 1908).
Further, an opportunistic debtor can even employ informal bankruptcy to avoid BAPCPA’S $137.000 cap on property immunities when debts are obtained through criminal or fraud means. Unlike the homestead restrictions, the fraud limitation on exemption levels never expires. Thus, in high–exemption states, fraudulent opportunistic debtors can still avoid this provision, mainly through informal bankruptcy, by resorting to the tactic of avoiding filing forever. Thus, despite BAPCPA provision, these opportunistic debtors can avoid their obligation through informal bankruptcy to repay their debts thereby ‘making their creditors wait for years together under state law.’ (Alper, 1928).
The non-opportunistic debtor often strides through informal bankruptcy on their own. However, opportunistic debtors will hire specialist attorneys to help them. Further, federal law restricts garnishment to 30 times the minimum wages and restricts states from augmenting this limit, and opportunistic debtors may be pleased to lose a few hundred dollars per month in wages if their probable dischargeable debts will surpass that annual limit. (Alper, 1929).
Permissible wage garnishment level differs from state to state and states with strict limitations on garnishment have a large number of informal bankruptcies. Therefore, opportunistic debtors may select to face their creditors in states that restrict or wholly exempt garnishment. As a result, ‘zero-garnishment’ may join ‘unlimited –homestead exemption’ and act as a yardstick for the apt opportunistic safe heaven. Amusingly, Florida and Texas, the most famous nesting grounds for opportunistic debtors, also successfully restrict wage garnishment. (Alper, 1929).
BAPCPA limits the magnitude to which opportunistic debtors can transform assets from non-exempt to exempt form just before their formal bankruptcy filing. Before these restrictions, debtors expecting bankruptcy could sell off their assets and transform the proceeds into home equity. Many state acts have restricted such fraudulent transactions. However, BAPCPA broadened the statute of limitations on such transfer from 1 to 10 years. This stipulation probably could thwart opportunistic debtors from acquiring luxurious homesteads within 10 years of a bankruptcy filing, largely extending the three and half years period stipulated by § 522 (p), if a court finds that the debtor planned with an ulterior motive to declare bankruptcy at a future date. (Alper, 1930).
Thus, the opportunistic debtors will not be deterred by the new fraud provision of BAPCPA. For fraudulent transfers, the BAPCPA has increased the statute of limitations, it did not notably alter the definition of fraud, which creditors have long had difficulty in establishing. Pre-bankruptcy transformation of non-exempt assets to exempt assets, for instance, has long been held not to compose a fraudulent transfer. According to Professor Moringiello who analyzed BAPCPA’s new fraud stipulation and held that ‘fraud will not be easy to prove under the new law as it was in the pre-BAPCPA period.’ (Alper, 1930).
Thus, the BAPCPA fraud stipulation will compel more debtors toward informal bankruptcy. Only state law interpretations of fraud will apply to debtors who have not filed the bankruptcy. Normally, courts have allowed debtors to preserve their property exemptions even when there is a clear design to avoid creditor collection initiatives. (Alper, 1931).
Any Known or Assumed Unintended Consequences of the Law
Given the ever-mounting risks that US society now facing like the increase in outsourcing of jobs, the increase in the risks of homeownership, and the ever-increasing health care costs, critics are of the view that the timing of this law’s passage was in direct antagonism to the US long-standing policy of offering the neediest debtors with a fresh start. (Rodriguez 65).
BAPCPA has been under constant attack from the entire academic, legal, and judiciary circles. The majority of opponents have criticized substandard legislative drafting and injury to honest debtors, mainly with an ulterior motive to drive away opportunistic debtors from the gamut of bankruptcy. They also argued that Congress has shut the doors of bankruptcy relief to many individuals witnessing legitimate monetary hardship.
BAPCPA has been unjustly criticized for the flooding of Chapter 11 liquidations that have haunted the USA’s economy over the past years. After the legislation of BAPCPA, distressed retailers are most improbably to survive once they are compelled to file bankruptcy safeguards. Thus, BAPCPA legislation is said to have established the following anomalies in the USA.
- Those sick companies which have opted for bankruptcy under Chapter 11 have been impacted by the over-leveraged structure as contrasted to companies that filed bankruptcy before the introduction of BAPCPA.
- The recent credit crisis has resulted in the famine of capital and following the years of lax lending, lenders have become more risk aversion.
- Specialty stores are in trouble as they could not be able to compete with the dominance of large discount stores.
- The fast growth witnessed by online sales companies like Amazon and Wal-Mart.
- The declining attraction of shopping malls.
- Unprecedented fall in the popularity of leasehold interests and real estate.
Thus, immediately after the introduction of BAPCPA, the happenings of the foregoing are to be blamed for the failure of many retail industries in the USA. (Gottlieb, Klein and Sussman, 2009).
Whether We Should Continue/Change This Law
After Democrats came to power in 2006, critics of BAPCPA headed various committees and held hearings on oversight of BAPCPA implementation, predatory subprime home mortgage lending, and credit card industries practices.
It should be the initiative of Obama’s government to focus on increasing penalties and liabilities for lenders who sanctioned risky credit to low-income citizens and vulnerable debtors.
To me, BAPCPA has to be restructured, amended thereby correcting many apparent flaws found in the statute. Further, I feel that provisions relating to credit counseling, undergoing financial management courses, subjecting to a means test are to be deleted. Further, genuine debtors should be allowed to get out of their debts and to have a fresh start.
How This Law Impacted Market Structure
BAPCPA has been damned for the epidemic of Chapter 11 liquidations that have haunted the U.S.A’s economy over the past few years. Immediately, after its enactment in the year 2005, BAPCPA has considerably damaged the Chapter 11 practice, to the stage that it is nearly unfeasible for retailers to restructure, despite the contemporary international and national economic meltdown.
BAPCPA has been accused since its passage has poignantly damaged the capability of retailers to avail the required post-petition credit or finance and breathing space for creditors to design and implement a reorganization scheme, despite the debtor’s capital base, the oscillating condition of the credit markets or the degree to which they vie with giant discount retailers like Amazon and Wal-Mart. Thus, BAPCPA has impacted the retail market structure to a larger extent. (Gottlieb, Klein and Sussman, 2009).
After the introduction of BAPCPA, the retail sector in the USA over the past four years has adopted either of the following ways namely.
- Retailers can either file their case as liquidation.
- Debtor is offered a small platform within which to administer it as a going concern sale. This falls under Section 363 of the Bankruptcy Code which usually generates adequate value to satisfy both secured creditors and administration. Further timing of the bankruptcy petition filing decides which of the above is to be perused. (Gottlieb, Klein and Sussman, 2009).
The retail sector is affected largely due to BAPCPA amendments, which have poignantly restricted the capability of retail debtors to restructure their debts. Thus, the revised Bankruptcy Code after the introduction of BAPCPA specifies the following.
- Within four months of their filing, debtors are required under Section 365 (d) (4) either to reject or accept their real property leases subject to an additional three months time extension granted by the court. Regardless of the size of the retailer, an extension cannot be granted beyond these 210 days without the consent of the landlord. This modification has been a complete transformation for retailers as they never faced any such deadlines before the introduction of BAPCPA.
- Within 20 days of filing, BAPCPA has provided utilities with augmented kinds of enough assurance of future payments.
- Offered sellers who tranship products received by the debtor within 20 days of filing bankruptcy with an administrative claim for the value of such products that must be convinced for a scheme of restructuring to be validated. These claims were afforded general unsecured status before BAPCPA and paid out at cents on the dollar immediately after the debtor’s re-emerging from the bankruptcy procedures.
- For wages and benefits earned within 6 months before filing, the aggregate monetary ceiling has been increased on unsecured priority claims to $ 10,950 from $ 4925.
- BAPCPA has restricted the period in which a debtor may file and demand acceptance for a scheme of restructuring. (Gottlieb, Klein and Sussman, 2009).
Consumer Outcomes From the Law
BAPCPA demands that any consumer who is filing for bankruptcy should receive a short lecture from a credit counseling agency and should finish an instructional short course in personal financial administration just before filing the bankruptcy petition. This will minimize any abuse filings.
For instance, a consumer debtor just before filing for bankruptcy cannot make a journey to Las Vegas on credit cards. The substantiation of the debtor that he was attempting to win money to pay back debt will not be accepted.
Further, BAPCPA makes it inordinately arduous to discharge student loan debt through appeals, which had been not only unheard of previously but also uncommon. (Wankel, 114).
Under BAPCPA, before filing bankruptcy, consumers are to be more careful in their borrowing and spending pattern. Within 3 months before the filing of bankruptcy, care should be exerted by consumers not to overspend on credit purchases.
Further, consumers are required to attend credit counseling from a recognized and approved non-profit credit counseling agency.
Consumers are needed to provide creditors with a copy of their tax return if they have been appealed to do so. Consumers are also under a duty to offer their creditors information about their debt so that creditors have written documentation about the helplessness to repay. The tax returns filed in the last four years have to be provided to creditors under Chapter 13. Further, an attorney must corroborate that information and statements documented and offered to the court are correct and true. (Burrell 205).
A consumer has to pass a means test to prove his eligibility under Chapter 7 and to establish that his inability to pay either the whole or a part of his debts. The means test is employed to assess whether the consumer is eligible to file for bankruptcy safeguards under Chapter 7 or Chapter 13 of the bankruptcy code.
However, under Chapter 13 bankruptcy, a consumer has to declare all his disposable income in a debt repayment scheme. Every year, the consumer’s expenses and income should be accounted for to assess whether any more income can be spared for debt repayment. (Burrell 206).
Some debts are categorized as priority debts under Chapter 13. These priority debts take superiority over all other debts and they must be repaid in whole before repayment of any other debt. For instance, some predetermined fees have to be paid to the court of administration to cover the administrative expenses to oversee repayment schemes under Chapter 13 and this takes superiority over repayment of all other debts. It is to be noted that even domestic support debts are ranked second in priority.
Any Business Opportunities That You Foresee.
BAPCPA will help to reorganize or restructure a business that is overburdened with debts. Chapter 13 is vehemently cheered as the bankruptcy filing for individuals. Instead of liquidation, these are rehabilitation and reorganization of a debt formulating a scheme whereby the debtor pays off his debts in a short time frame of 3 to 5 years. The uniqueness is that it is the debtor who moves the chess coins here as he is responsible to propose the plan.
Chapter 13 holds good for business, and it is like a reorganization filing. Here, it is the business that has to propose a plan, and a bankruptcy court decides whether it is equitable and fair and adheres with the objectives of relevant legislations like BAPCPA. Such filing could end in striking down the contracts for the business like union agreements and also obliges it to be delisted from its main stock exchange if it is a listed company and in such cases, that company shares can still be traded on the over-the-counter exchanges. The final result of a Chapter 11 plan often terminates shares in the company. ( Wankel,114).
How BAPCPA Addresses The Loopholes Of Earlier Bankruptcy Act 1998 And State Exemption Laws.
Exemption Restriction Based on Time of Filing
BAPCPA partly addressed the loophole available to opportunistic debtors who shift to unrestricted states just o buy a luxurious homestead and then apply for bankruptcy. BAPCPA has restricted the homestead exemption available to opportunistic debtors who recently shifted to a new state before applying for bankruptcy. The Bankruptcy Code now restricts any state’s homestead exemption to just $137,000 per debtor who purchases a home within forty months of applying for bankruptcy.
Thus, § 522 (p) of BAPCPA stipulates that even a long-time resident of a high-exemption state who buys a luxurious home in that state will also have his exemption capped to the above limit if he applies for bankruptcy within forty months of filing application for bankruptcy. However, citizens who have owned a home in an exempted state for longer than forty months still enjoy the full safeguard of their state’s homestead exemption. (Alpher, 1921).
In certain cases, BAPCPA restricts the aggregate homestead exemption at about $137,000 irrespective of the bankruptcy filing date and the homestead purchase date. These limitations apply when the debtor is found guilty of a felony that corroborates that bankruptcy filing was a misuse of the bankruptcy provisions or when the debt was created due to some kind of fraud. This proviso seems to be a congressional initiative to thwart the nastiest of bankruptcy misuse, application by opportunistic debtors to thwart debts arising from criminal or civil sanctions (Alpher, 1922).
How did Lobbying help To Legislate BAPCPA?
Whenever there is bankruptcy reform, creditors make strategic use of political contributions to achieving their aim. Various research studies indicate that campaign contributions were poignantly correlated with voting for a proposed bill demonstrating that ‘money twists the voting from its usual pattern.’ The mighty of credit companies to lure politicians to pass the law against their constituent’s interest substantiates the adverse trend in politics to support the interest of the affluent and at the cost of middle and lower classes.
Cheeseman, Henry R. Business Law (7th edition). New York: Prentice Hall, 2009.
Gottlieb, Lawrence C, Klein Michael and Sussman, Ronald R. 2009. “BAPCPA’s Effects on Retail Chapter 11s Are Profound.” Web.
Rodriguez, Dariely “Left Behind: The Impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 on Economic, Social, and Racial Justice.” Berkeley La Raza Law Journal 18.1 (2007): 65-77. Academic Search Premier. EBSCO. Web.
Rodriguez, Dariley. “Left Behind. The Impact of BAPCPA of 2005 on Economic, Social and Racial Justice.” Berkeley La Raza Law Journal Vol.18 (2007):65-77.
Schriebman, Robert S. IRS Tax Collection Procedures. New York: CCH, 2006.
Steinfeld, Shayna M. Family Lawyers Guide to Bankruptcy. New York: American Bar Association, 2008.
Wankel, Charles. Encyclopedia of Business in Today’s World. New York: Sage Publications, 2009.