How Does the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 Affect Your Rights?

By M. Lewis Hall, III, Attorney, Williams Parker Harrison Dietz & Getzen, Sarasota Florida
(941) 366-4800

On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “Act”), making the most significant change to the Bankruptcy Code since 1978. Most of the changes made by the Act go into effect October 17, 2005. A few of the provisions, particularly the limitation on the homestead exemption, became effective immediately upon enactment. Most of the changes made by the new Act primarily affect individual consumer bankruptcy filings, but there are provisions affecting both corporations and small businesses.

At the heart of the new Act is the abuse standard for Chapter 7 (liquidation) filings. The abuse standard requires a debtor who is seeking Chapter 7 bankruptcy relief to pass one of two income tests – otherwise, the debtor will have to resort to either a Chapter 11 (reorganization) or a Chapter 13 (reorganization) for bankruptcy relief.

The limitation on the homestead exemption could be the most significant new provision in Florida, due to Florida’s unlimited homestead exemption. The provision reduces the debtor’s homestead exemption for increases in home value that resulted from the use of non-exempt property by the debtor, “with intent to hinder, delay, or defraud creditors” in the 10 years prior to the debtor’s bankruptcy filing. The new Act also contains a two-year residency requirement provision for state property exemption laws to apply – in other words, the debtor’s place of domicile for the previous 730 days will govern which state’s property exemption laws apply in the filing.

The new Act does increase the list of possible exclusions from a debtor’s bankruptcy estate. The most noteworthy of these exclusions include contributions to qualified benefit plans, education accounts or tuition credit accounts, and property transferred to tax-exempt organizations.

Other notable changes within the Act include longer wait times before filing subsequent bankruptcy cases, greater document production requirements, mandatory credit counseling as a prerequisite to filing a bankruptcy petition, and a provision allowing a Trustee to pay a tardily filed claim under certain circumstances.