Federal and state statutes that give protections to both the debtor and the creditor govern bankruptcy law. The law defines a way for debtors to get out of debt without harming their ability to lead a productive life in the future.
Federal bankruptcy laws were updated in 2005, under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which was passed to make it more difficult for individuals to file for bankruptcy. The Act eliminates the automatic eligibility to file for Chapter 7 bankruptcy and forces the repayment of some of an individual’s debt under Chapter 13 bankruptcy. Until 2005, most personal bankruptcy cases were filed as Chapter 7 Bankruptcy because debts were discharged and did not have to be repaid. A “Means Test” was added to the law so that those with the means to pay some of their debts now must file for Chapter 13 Bankruptcy. Under Chapter 13 bankruptcy, an individual must develop a repayment schedule period. The discharge of the debt under Chapter 13 bankruptcy is not issued until the bankruptcy trustee has received the last payment in the plan.
Changes to the federal bankruptcy laws also created the requirement that everyone seeking bankruptcy protection must undergo credit counseling before filing for Chapter 7 or Chapter 13 bankruptcy. These changes also increased the fees associated with bankruptcy and the paperwork necessary for filing.
The initial step in the “Means Test” to determine eligibility to file Chapter 7 bankruptcy is to determine an individual’s income. To do this, you will be required to state your income for the past 6 months. That number will be used to determine annual income. If a person’s annual income is below the average income for the area in which they live, they will automatically qualify for Chapter 7 bankruptcy. If not, the means testing continues in order to determine if there is any disposable income to facilitate a payment plan under Chapter 13 bankruptcy.