With many people filing for bankruptcy, creditors and debtors alike have been asking the question, what is the true purpose of bankruptcy? Congress originally stated that bankruptcy was created to give debtors a "fresh start". Many people are questioning the true purpose of bankruptcy because of the large amount of changes to the bankruptcy code over the recent years. Recently, the Supreme Court stated that the reason for the 2005 amendments to the bankruptcy code were added to make sure that debtors would repay their creditors as much as they could afford.
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Before bankruptcy was created, past societies previously believed that a debtor should pay back all of their debt to their creditor, no matter what it took. Many countries would put people in debtor's prison to hold them hostage, hoping that their friends and family would scrape the money together to pay the imprisoned person's debts. After finding out that that always didn't work too well, the courts decided the best way for bankruptcy to work was to take all the debtor's assets and sell them so all the creditors could be paid back an equal share. Not until 1898 was the first modern Bankruptcy Act put in place in America. In its modern version a bankruptcy filing was created to give a debtor a fresh start. The idea behind this was that Congress felt that giving a person a second chance that was deep in debt would not only be good for the debtor but it would benefit everyone. Through the years the bankruptcy court system has upheld the fundamental purpose of bankruptcy is the fresh start for the debtor. The basis for our current bankruptcy code was enacted in 1978 and has been amended numerous times since it has been effective.
Back in 2005, Congress changed the bankruptcy law to shift the emphasis away from the bankruptcy discharge that is given to the debtor and towards a system that tends to benefit the creditors. The 2005 BAPCPA added a means test that regulates based on the states median income and household size whether or not a debtor can qualify for Chapter 7 bankruptcy. In many circumstances it's not a true test for qualification of bankruptcy. The debtor has to list all their monthly expenses on the test and put it against their income and the general idea is if they have something left the court feels they can pay their debts. Failing the means test for Chapter 7 suggests the debtor will have to file Chapter 13 bankruptcy for debt relief. This is one of the landmines that many debtors face when filing bankruptcy. An experienced bankruptcy attorney will many times be able to figure out something to make it work if at all possible. Sometimes it might be as simple as delaying the bankruptcy filing.
As the bankruptcy law continues to change it seems to favor the creditors more and more. Over the last couple years the courts have been starting to limit the amount of deductions used to qualify under the means test. This will force many more into filing Chapter 13 bankruptcy. This takes away from the idea that filing bankruptcy is supposed to give a debtor a fresh start. With these changes to the law people who are right on the edge of qualifying for Chapter 7 bankruptcy, forcing them into a Chapter 13 will be just setting them up for failure. It's starting to seem that courts have been swinging in the direction of favoring the creditor. If you're in this situation, contact a bankruptcy attorney to see if there's anything that can be done to rectify the discrepancies so you can pass the means test.
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