The Short Answer
The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) made filing bankruptcy significantly more complex. The biggest change was the means test — a formula that determines whether your income qualifies you for Chapter 7 or pushes you toward Chapter 13. New rules also require you to hand over proof of income, file any outstanding tax returns, and complete two mandatory courses: a credit counseling course before filing and a financial management course before your discharge.
Before 2005 it used to be fairly easy and cheap to file bankruptcy. When the bankruptcy laws changed in 2005 the process for filing for bankruptcy became more complicated. Due to the complications of cases fees across the country for filing bankruptcy also went up.
One of the main things that changed is the requirement to pass the “means test” in order to be able to qualify to file a Chapter 7 bankruptcy. Generally speaking, if your average monthly income is less than the states median income, then you will pass the means test. If your average monthly income is more than the states median income, then there are a few other things that are taken into account to determine if you will pass or not. In this case, the means test looks into your income, expenses and the total amount of debt you owe. If that determines you have enough income to pay a certain amount to those creditors each month, then you will fail the means test. This means that you will not qualify to file a Chapter 7 bankruptcy but, instead, you can seek bankruptcy protection under a Chapter 13 bankruptcy.
Another thing that the new laws now require is the debtors have to provide proof of income. This means that they must provide their tax returns for the previous year to the trustee. If the previous years’ taxes have not been filed, they must get filed before the bankruptcy filing can proceed. This goes for both Chapter 7 bankruptcies and Chapter 13 bankruptcies.
The new laws also now require people who file bankruptcy take a credit counseling course and a financial management course. These must be through government-approved agencies, so make sure to check with your attorney to find out which ones are government-approved. If these companies suggest a repayment plan or other options, you do not have to follow them. For bankruptcy purposes you only have to be able to show that you have taken the course. A lot of debtors feel that these courses help and give them good information.
These are a few of the main changes that accompanied the bankruptcy law changes in 2005.
Key Takeaways
- The means test compares your average monthly income over the past six months to North Carolina's median income to determine whether you qualify for Chapter 7 bankruptcy.
- If you earn more than the state median, the means test also weighs your allowable expenses and total debt to decide whether you have enough disposable income to repay creditors.
- Failing the means test doesn't end your options — it typically means Chapter 13, where you repay a portion of your debt over 36 to 60 months, is the right path.
- Both Chapter 7 and Chapter 13 filers must provide proof of income and submit tax returns for the prior year to the bankruptcy trustee before the case can move forward.
- You must complete a government-approved credit counseling course before filing and a financial management course before receiving your discharge — your attorney can point you to approved providers.
- Because of the added complexity the 2005 law introduced, attorney fees for bankruptcy cases rose nationwide — but professional guidance also became more important than ever.
Attorney Insight
The mistake I see most often is people assuming the means test is simply an income cap — pass or fail, end of story. In practice, even if your income exceeds North Carolina's median, you may still qualify for Chapter 7 once allowable expenses are factored in. The calculation is more nuanced than a headline number. What the 2005 law really did was make it essential to run the numbers carefully before assuming Chapter 7 is off the table — or that Chapter 13 is your only option.
