History of Bankruptcy (Part Two)

This is part two of two on the history of bankruptcy.  This post covers the Bankruptcy Law of the United States.  The previous post on this topic covered the ancient history of bankruptcy and its origins.  Like the last post on this topic this post is an excerpt from my book "Should I File: A Definitive Guide to Bankruptcy," which can be bought by clicking the link below. 

The first act of Congress was the Bankruptcy Act of 1800, and while that act was repealed and amend multiple times before the current law was enacted in 1938 the basic concept remains very much the same.  There been several changes to the Bankruptcy laws since 1938 but in general the law remains the same.

Many readers will recall the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  When the bill passed in to law the news media, fueled by bankruptcy attorneys looking for a quick buck made it sound as if once the law took effect in October of 2005 it would become nearly impossible to file a bankruptcy and that if you were successful in qualifying you would still spend many years in debt and in many cases would lose all of your personal property.   After the law passed and was signed into law in April of 2005 by then President George W. Bush, these claims were repeated so often that many of them persist today.

Most aspects of the new law did not take effect until October and the period of time between April and October of 2005 became a virtual gold rush for bankruptcy attorneys many of whom filed more than ten times their usual number of bankruptcy.  One such attorney I talked to told me that he filed over 400 bankruptcies in the 5 days before the law took effect.  This mad rush of filings was most likely due to the misconception that after October of 2005 Bankruptcy as we know it would no longer exist.  Ironically many of the attorneys practicing in this area fell for their own hype.  I know of several former bankruptcy attorneys so scared of the new law that they stopped filing them all together.

In retrospect, the changes in the Bankruptcy law did little to prevent the protection of the code.  The most significant change from the average debtors perspective is the creation of an income based test, known as the means test.  The means test prevents certain high income debtors from discharging (eliminating) all of their debt.  In the case of high income debtors or debtors who make more than the means test allowable amounts (which varies by state) there is a requirement that make their best efforts to pay back some portion of their debts.  The amount that they pay back is determined by among other things their ability to pay after allowances for reasonable living expenses.  This type of repayment bankruptcy is known as a Chapter 13 Bankruptcy.