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President Bush as signed the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," the most wide ranging revision of the bankruptcy code since 1978, on March 10, 2005.  The new bill, running some 500 pages, imposes a detailed "means test" on high income debtors .

With few exceptions, all of the provisions of this bill will go into effect October 17, 2005, 180 days after signature by the President. A full copy of this bill can be found at the Library of Congress web site, thomas.loc.gov (search S. 256).

The most publicized portion of the bill is a so-called "means test", intended to force some high-income bankruptcy debtors to file Chapter 13 rather than Chapter 7.  The intent of the new bankruptcy bill is to supplement the broad discretionary language of the existing substantial abuse provision with a detailed and complex scheme for determining high income bankruptcy abusers. Under the proposal, debtors whose income exceeds the median income for their state would have their household income compared to a chart of expenses found in the IRS collection handbook. If a debtor's income exceed payments on secured claims and other expenses allowed by the IRS, the case would be presumed to be abusive and would be dismissed if not converted to Chapter 13.

This provision, by itself, may have little effect in New York State outside the Metro New York City area. According to the Census Bureau, the median income for a family of four in New York in 2003 was $68,354, and very few bankruptcy debtors in the Western District of New York have household incomes that exceed this amount. But, at a minimum, the provision complicates bankruptcy filings. Higher income debtors would need to calculate expenses based both on the debtor's actual expenses and upon the expenses allowed by the IRS collection handbook.

According to the American Bankers Association, a strong supporter of the bill, "this ‘bright-line' rule would compel trustees and bankruptcy administrators to assure that more affluent filers with the ability to pay back at least a portion of their outstanding debt in a Chapter 13 proceeding enter into one to receive the benefits of bankruptcy protection."

While high income debtors may be rare in this area, the bankruptcy court still has the broad authority to dismiss a case as an "abuse", independent of the statutory means test. By changing the language of §707(b) from "substantial abuse" to simply "abuse", the new provisions presumably would lower the standard needed to dismiss an abusive case. Cases like Kornfield would still be good law, and the threshold for dismissal might be broader than current law.

February 22, 2005: WESTERN NEW YORK BANKRYPTCY SEMINAR SCHEDULED:  The Bar Associations in Monroe County (Rochester) and Erie County (Buffalo) plan a second annual seminar on bankruptcy on  May 6 in Batavia.  Last year's first-ever event was a huge success, with all three bankruptcy judges for the district appearing, along with c. 150 attorneys.  I have been invited to speak at the seminar on the issue of substantial abuse.