Understanding the Bankruptcy Reform Act

Signed into law in April of 2005, the Bankruptcy Reform Act of 2005 was created in order to reduce the amount of people filing for bankruptcy. The new act has had profound effects on the financial landscape in America, and many of the changes have forever altered the bankruptcy process. Three of the biggest parts of the reform act were the creation of the ‘means test,’ the addressing of ‘serial filers,’ and the requirement of credit counseling.

The Means Test

The introduction of the means test was one of the most controversial changes ever made to the bankruptcy code. In essence, the means test requires a debtor’s income to be compared to the median income of individuals in that state. If the debtor’s income is greater than the median, the individual is not allowed to file for chapter 7 bankruptcy. The test ultimately states that when filing for bankruptcy, you must be unable to pay your debts and make less than the median income in your state.

Serial Filers

Under the bankruptcy reform act, a serial filer is known as someone who is filing for bankruptcy under multiple different chapters. A common practice for people in severe financial situations has been to file for chapter 7 and then immediately chapter 13. This is unofficially known as chapter 20. The Reform Act aims to discourage chapter 20 by creating a minimum time limit between filing for bankruptcy.

Credit Counseling

The third major thing the Bankruptcy Reform Act of 2005 introduced was the requirement for credit counseling. The debtor is required to receive credit counseling before filing for bankruptcy. Law firms are required to offer some sort of reduced credit counseling service for those unable to pay.