What is the Bankruptcy Code and what changes were made to it by Bankruptcy Reform Act?

The Federal Bankruptcy Code is a complex set of statutes passed by the United States Congress. The Bankruptcy Code was recently revised by way of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The major provisions of the BAPCPA were effective as of October 17, 2005. The BAPCPA is often times referred to as the Bankruptcy Reform Act.

The Bankruptcy Code is located in Title 11 of the United States Code and is subdivided into “chapters.” Some of the chapters relate to all bankruptcy debtors and govern the administration of bankruptcy cases and the disposition of property in those cases. However, a debtor files a bankruptcy pursuant to either chapter 7, 11 or 13. Consumer debtors usual file a bankruptcy under Chapters 7 or 13. Chapter 7 is sometimes called a “straight bankruptcy” – basically you file and a few months later – PRESTO – you get your discharge. A Chapter 13 requires making monthly payments for 3-5 years; 13s are generally filed only when a person can’t justify a 7 because they have too much income, they want the opportunity to get current on mortgage arrears to avoid a foreclosure, etc. Chapter 11s are generally reserved for much more complex business scenarios. For example, Enron and United Airlines filed under Chapter 11.

The Bankruptcy Reform Act made changes to virtually every area of the Bankruptcy Code. A technical summary of those changes was prepared by the Hon. Eugene R. Wedoff, Judge of the U.S. Bankruptcy Court for the Northern District of Illinois. . Reading and interpreting these changes is not for the meek: attorneys, the courts and the Congress will likely be arguing about the ambiguities and the application of the Reform Act for many years to come.

While the Reform Act made sweeping changes, the question of practical significance to the average debtor is: How does this affect me? Am I – or am I not – eligible to file for a bankruptcy? For the vast majority of people, the nuances of bankruptcy law and reform mean very little. In fact, other than added complexity and expense, the net result is still the same: A debtor files a Chapter 7 and gets rid of their credit card debt. Yes, there is now a “means test,” wildly misinterpreted and exaggerated for the most part. Without the expertise of a competent lawyer and the detailed analysis of a host of factors (including expenses and secured debt and special IRS qualified allowances), a layman simply cannot determine by the amount of his income whether he qualifies for Chapter 7 or not.