The New Bankruptcy Law: Changes to Chapter 7 and 13

Bankruptcy laws don't change very often. The federal bankruptcy code is big and complicated, and updates can have a big impact throughout it. The latest overhaul took place in 2005, reworking the code that had been in operation since 1978.

The 2005 changes passed by Congress are parts of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which is often referred to as the "new bankruptcy law." Among its changes, the new bankruptcy law:

• made it harder for some people to file for Chapter 7 bankruptcy by instituting a "means test"
• added requirements for credit counseling and counseling on budgeting and debt management
• imposed new requirements for bankruptcy lawyers, and
• changed expense calculations for Chapter 13 filers.

New "Means Test" for Chapter 7 Bankruptcy

Under pre-2005 bankruptcy rules, most filers could choose the type of bankruptcy best for them—and most chose Chapter 7 bankruptcy (liquidation) over Chapter 13 bankruptcy (repayment).

The law passed in 2005 requires that some filers with higher incomes pass a "means test" to determine if they can afford to repay some of their debts that might otherwise be discharged in Chapter 7.

How High Is Your Income?

Under the rules enacted in 2005, the first step in figuring out whether you can file for Chapter 7 bankruptcy is to measure your "current monthly income" against the median income for a household of your size in your state. If your income is less than or equal to the median, you can file for Chapter 7 bankruptcy. If it is more than the median, however, you must pass "the means test," a calculation that takes into account your household income and expenses when considering your ability to repay your debts.

The median income for your state changes from year to year. You can look up the current median for your state at the US Trustee's page on means testing.

The Means Test Calculation

The purpose of the Chapter 7 means test is to figure out whether you have enough disposable income to repay some of your debts by making payments on a Chapter 13 plan. To find out whether you pass the means test, you subtract certain allowed expenses and debt payments from your current monthly income. If the income that's left over after these calculations is below a certain amount, you can file for Chapter 7.

Check out our section on the bankruptcy means test to learn more.

Credit Counseling Requirements

Under the new bankruptcy law, before you can file for bankruptcy under either Chapter 7 or Chapter 13, you must complete credit counseling with an agency approved by the United States Trustee's office. The purpose of this counseling is to give you an idea of whether you really need to file for bankruptcy or whether an informal repayment plan would get you back on your economic feet.

Counseling is required even if it's obvious that a repayment plan isn't feasible or you are facing debts that you find unfair and don't want to pay. You are required only to participate, not to go along with any repayment plan the agency proposes. However, if the agency does come up with a repayment plan, you will have to submit it to the court, along with a certificate showing that you completed the counseling, before you can file for bankruptcy.

Toward the end of your bankruptcy case, you'll have to attend another counseling session, this time to learn personal financial management. Only after you submit proof to the court that you fulfilled this requirement can you get a bankruptcy discharge wiping out your debts. (The U.S. Trustee's website also lists approved credit counselors.)

Check out our section on pre-bankruptcy credit counseling and debtor education for more in-depth information.

Chapter 7 Bankruptcy Requirements for Lawyers

The changes to the bankruptcy law enacted in 2005 added some complicated requirements to the field of bankruptcy. Those requirements made it more expensive—and time-consuming—for lawyers to represent clients in bankruptcy cases, which means attorney fees went up.

The 2005 law also imposed some other new requirements on lawyers, chief among them a duty to verify the accuracy of the information their clients provide them. The verification requirement means attorneys have to spend more time on bankruptcy cases, and they charge their clients accordingly.

To learn more about finding the right bankruptcy lawyer for your case, how much typical attorney fees are, and more, see Bankruptcy Help: Lawyers and Petition Preparers.

Some Chapter 13 Filers Have to Live on Less

Under the old rules, people who filed under Chapter 13 bankruptcy had to devote all of their disposable income—what they had left after paying their actual living expenses—to their bankruptcy repayment plan.

The 2005 law added a wrinkle to this equation: Although Chapter 13 filers still have to hand over all of their disposable income, they have to calculate their disposable income using allowed expense amounts dictated by the IRS—not their actual expenses—if their income is higher than the median income in their state. These allowed expense amounts must be subtracted not from the filer's actual earnings each month, but from the filer's average income during the six months before filing.

Learn more about calculating your disposable income in Chapter 13 bankruptcy.

Other Changes in the New Bankruptcy Law

Other changes were made in 2005 that have affected some bankruptcy filers negatively. Property is valued differently—at replacement cost instead of at auction value, which means more debtors are at risk of having their property taken and sold by the bankruptcy trustee. Another change has to do with how long a filer must live in a state to use that state's bankruptcy exemption laws, which can make a big difference in the amount of property a bankruptcy filer gets to hold on to. (

You can learn about bankruptcy exemption domicile rules.

All of these changes and others are explained in detail in The New Bankruptcy: Will It Work for You? by Attorney Cara O'Neill (Nolo).