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How New Bankruptcy Laws Impact Debt Restructuring

By Spodek Law Group | February 20, 2024

How New Bankruptcy Laws Impact Debt Restructuring

Key Bankruptcy Law Changes

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) made several notable amendments to the bankruptcy code. Some of the major changes include:

  • Means testing for Chapter 7: The law imposed a “means test” to determine if filers qualify for Chapter 7 bankruptcy, which fully discharges many debts. Filers above state median income levels may be required to file under Chapter 13 instead, which establishes repayment plans.
  • Increased costs: BAPCPA increased the administrative costs of filing, including attorney fees. This can make bankruptcy less affordable, especially for low-income individuals.
  • Reduced timeframes for discharge: The law lengthened the timeframes for a filer to qualify for a second discharge under Chapter 7 or 13, making repeat filings more difficult.
  • Credit counseling requirements: Filers must now complete approved credit counseling courses both before and after filing for bankruptcy. This adds time and costs to the process.

These changes aimed to reduce perceived bankruptcy system abuse. However, they also introduced new hurdles that can negatively impact financially distressed filers.

Impact on Debt Restructuring

Bankruptcy can provide powerful tools for restructuring and discharging unmanageable debts. However, recent legal changes have altered how effectively filers can utilize debt relief options.

Chapter 7 Liquidation

Chapter 7 bankruptcy fully discharges many unsecured debts like credit cards, medical bills, personal loans, and more. The means testing thresholds now make this option unavailable or extremely difficult for many middle-income filers.

As an alternative, higher-income filers may turn to Chapter 13 or other repayment programs better suited for their financial means. But these programs do not provide the same comprehensive debt relief as a Chapter 7 discharge.

Chapter 13 Repayment Plans

Chapter 13 bankruptcy allows filers to establish 3-5 year repayment plans structured around their income and expenses. Filers must repay creditors to the best of their abilities during this timeframe.

While BAPCPA did not specifically target Chapter 13, some of the ancillary legal changes still impact filers:

  • Increased costs can make Chapter 13 cases more difficult to complete on tight budgets.
  • Credit counseling adds time and administrative hurdles to filing.
  • Reduced second-time discharges make repeat Chapter 13 filings impractical for struggling filers.

These changes can reduce the flexibility and discharge power of Chapter 13 for debt restructuring.

Other Debt Relief Options

With bankruptcy more difficult post-BAPCPA, struggling individuals and businesses may consider non-bankruptcy debt relief alternatives like:

  • Debt management plans
  • Debt consolidation loans
  • Debt settlement/negotiation
  • Mortgage modifications

However, these options do not provide the same legal protections and discharge relief as bankruptcy. They also frequently fail to deliver promised outcomes. As a result, financially distressed individuals can remain stuck in debt without viable options.

Key Takeaways

Bankruptcy can still provide meaningful debt relief and restructuring for qualified filers. But recent legal changes have reduced access and altered debt resolution outcomes. Key impacts include:

  • Reduced Chapter 7 eligibility for middle-income filers
  • Increased costs and hurdles for Chapter 13 filers
  • Pushed financially distressed individuals towards less effective debt relief options

As a result, struggling households and businesses can no longer rely on bankruptcy as a financial safety net to the same degree as in past decades. Filers need to understand these paradigm shifts when evaluating bankruptcy in their debt resolution strategy.

Consulting qualified legal counsel is essential to navigate the complex post-BAPCPA landscape. Attorneys can help debtors understand all their options and develop customized debt restructuring plans aligned with current laws. This can increase the likelihood of achieving financial stability even within the constraints of today’s bankruptcy system.


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