Reasons for Reform

• In 1998, the number of bankruptcy filings exceeded 1 million for the first time in U.S. history and by 2004 the number of filings had increased to over 1.6 million filings. Consumers were starting to see bankruptcy as no longer a last resort to their debt troubles but a first stop in an effort to get rid of their debt. The existing bankruptcy system had loopholes that allowed abuse of the bankruptcy process to occur.
  
  

Witness Testimony

• As bankruptcy filings piled up, the costs of not being able to collect debts was passed on to Americans who were responsible in paying their debts. One witness gave testimony regarding this trend at a Senate Judiciary Committee's hearing: "When creditors are unable to collect debts because of bankruptcy, some of those losses are inevitably passed on to responsible Americans who live up to their financial obligations. Every phone bill, electric bill, mortgage, furniture purchase, medical bill, and car loan contains an implicit bankruptcy 'tax' that the rest of us pay to subsidize those who do not pay their bills."
  
  

Means Test

• With the passage of the bankruptcy reform law, a means test is employed to determine under which chapter of the U.S. Bankruptcy Code that a debtor can file. Many personal bankruptcies are filed under Chapter 7. With the reform, fewer people have been able to file for Chapter 7 bankruptcy protection. The means test compares the debtor's family income to the median family income in his state for families of the same size. If his income is less than or equal to the median family income, he cannot file for Chapter 7 bankruptcy. The purpose of this test is determine if a debtor seeking bankruptcy protection has the means to repay her creditors.
  
  

Chapter 7

• In a Chapter 7 bankruptcy, a debtor's non-exempt assets are sold by an appointed bankruptcy court trustee who then uses the proceeds of the sales to pay off the debtor's creditors. At the end of the process, the debtor will likely have the remainder of his debts discharged. If, however, the debtor's income is more than the state's median, he will be forced to file for Chapter 13 bankruptcy.
  
  

Presumption of Abuse

• If after filing for Chapter 7 bankruptcy protection and employing the means test the debtor's income is more than the state's median, it will be presumed that the debtor is attempting to abuse the bankruptcy process. The law considers a person whose income is above the state minimum to be a person who can pay his debts. In that case, the debtor will have to convert to Chapter 13 bankruptcy or not file bankruptcy protection at all. In a Chapter 13 bankruptcy case, a debtor must pay her debts in a repayment plan that spans from three to five years.