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New Bankruptcy Law - Summary & Legislative History

Encouraged by the passage of the Bankruptcy Reform Act of 1994 (Pub. L. No. 103-394, 108 Stat. 4106), commercial creditors increased lobbying efforts for broad-sweeping bankruptcy reform. Citibank, MBNA and other large credit card issuers actively contributed proposed amendments and generous financial support. With each passing year since 1994, congressional favor for reform flourished in a rich environment. See new bankruptcy laws - legislative history for more information. Then:

New Bankruptcy Law Reform Arrived:

On March 11, 2005, the Senate passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Senate Bill 256). All Republicans block voted in favor of reform.

On April 14, 2005, the House of Representatives approved the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. All Republicans block voted in favor of reform. Three Democrats also voted for reform.

On April 20, 2005, President Bush signed the bill. This Act becomes effective 180 days after Presidential approval - on October 17, 2005.

Provisions of new bankruptcy laws
Large commercial creditors laud reform as a return to traditional sensibilities. According to Sen. Paul Wellstone (D-Minn., dec.), the pending new bankruptcy laws are "ill conceived, unjust and imbalanced, requiring debtors-in-bankruptcy defeat Goliath to subsist in poverty." The Bankruptcy Abuse Prevention and Consumer Protection Act and related acts include the following amendments:

Under proposed new bankruptcy laws, chapter 13 debtors shall be restricted to monthly living allowances mandated by the IRS, regardless of individual circumstance, upon the same quasi-criminal standard used when prosecuting unpaid taxes (the "means test" under IRS "National Standards and Local Standards, Internal Revenue Service"). Under current laws, a debtor's financial means is determined on a case by case basis. See new bankruptcy laws - monthly living allowances for more information.

Under proposed new bankruptcy laws, chapter 7 is prohibited for any individual earning more than $100 per month disposable income if debts owed total less than $24,000.

Under proposed new bankruptcy laws, chapter 7 is prohibited for any individual earning more than $166 per month disposable income if debts owed total $24,000 or more. Current laws allow employed debtors to file chapter 7 without income restrictions. See new bankruptcy laws - means testing for more information.

Under proposed new bankruptcy laws, if the value of collateral is less than debt owed, debtors must pay the higher amount to retain property. Current laws allow debtors to choose the lower amount - "cram-down" to actual collateral value under Chapter 13.

Under proposed new bankruptcy laws for chapter 13, debtors shall live under court supervision with all disposable income applied to the full payment of all debts for a period of 5 years, or until paid in full. Compare new bankruptcy laws - current chapter 13 payments to new bankruptcy laws - proposed chapter 13 payments increase.

Under proposed new bankruptcy laws, all Chapter 7 debtors presumptively file in "bad faith," with the burden placed upon debtors to disprove the presumption. This amendment effectively creates a rebuttable presumption of "guilt until proven innocent" with criminal punishment available in some circumstances.

Under proposed new bankruptcy laws, penalties are mandatory against all debtors who assert facts, pleadings or requests without "substantial justification". Innocent errors are not excluded. This zero-tolerance provision does not apply to creditors.

Under proposed new bankruptcy laws, mandatory penalties are required against all debtors' attorneys who assert facts, pleadings or requests without "substantial justification." Innocent errors are not excluded. This zero-tolerance provision does not apply to creditors' attorneys.
Under proposed new bankruptcy laws, each creditor may request dismissal at anytime. Dismissal then becomes mandatory, without judicial discretion, unless the debtor rebuts each allegation and proves entitlement to relief. The debtor is solely responsible for attorney fees for each defense.

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