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Bankruptcy Reform – Will It Affect Eligibility?

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23, was signed into law by President George W. Bush on April 20, 2005. It represents one of the most comprehensive overhauls of the Bankruptcy Code in more than twenty-five years. The most significant and controversial new provision is the “means test” which requires the bankruptcy court to consider a debtor’s ability to pay his creditors and allows the judge to dismiss a Chapter 7 petition for discharge of debts or convert it to a Chapter 11 or 13 repayment plan.

Under the new Bankruptcy procedures, can a court reject a bankruptcy petition?

Even before the 2005 reforms, due to the increased number of bankruptcy filings, more would be bankrupt debtors’ petitions were being rejected by bankruptcy court judges based on existing restrictions, such as: six years have not passed since the debtor last filed for bankruptcy; the value of a debtor’s assets exceed the amount of his or her debts; or the debtor is able to pay his or her debts. Furthermore, bankruptcy courts do not look favorably upon debtors who are committing or who have committed fraud to avoid having to pay their debts. An example of such fraudulent behavior includes the transfer of a debtor’s assets to, say, a spouse or a child in order to avoid having to pay a creditor.

Under the amended provision for dismissal of a Chapter 7 case or conversion to a case under Chapter 11 or 13, 11 USCS § 707, the standard for dismissal changed from ”substantial abuse” to ”abuse.” It is unclear how much impact this will have; few, if any, courts permitted a chapter 7 case to proceed because they found it to be an abuse, but not a substantial abuse, under prior law. If courts found cases to be abusive under the totality of the circumstances, those cases were dismissed.5

Similarly, the amendments eliminated the sentence that created a presumption in favor of granting chapter 7 relief to the debtor. Again, it is not clear whether this will make much difference in motions under section 707(b). Few courts relied upon this presumption to alter the disposition they would otherwise have ordered. However, the amendments also created a presumption against granting relief to the debtor, a presumption of abuse, in certain cases.

Finally, the former language of section 707(b), which is now incorporated in section 707(b)(1) was amended to provide that as an alternative to dismissal, the court could convert a case to chapter 11 or chapter 13 with the debtor’s consent. This, too, is not a marked change from the pre-existing practice, as debtors facing dismissal under former section 707(b) had normally been given the opportunity to voluntarily convert their cases to chapter 11 or chapter 13.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.


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