By John Duoba, Business Owner's Toolkit Staff Writer, and Steven Cooper, CCH Washington Staff Writer

The House of Representatives approved the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 on April 14, 2005. A bipartisan vote of 302 to 126 sends the measure to President George W. Bush, who has promised to sign it.

Lawmakers rejected attempts by some House Democrats to amend the legislation, and as a result, a conference committee with Senate lawmakers to iron out any differences will not be necessary. Previously, on March 10, the Senate had voted 75-24 in favor of the measure.

The bankruptcy reform bill would make it more difficult for consumers to avoid repayment of debts under bankruptcy protection, as it would subject them to a means test to determine their ability to pay back creditors. The measure would require debtors who have the means to pay to enter a repayment plan in Chapter 13, rather than having their debts canceled under Chapter 7 of the Bankruptcy Code.

The means test would not be applied to debtors who earn less than the median income in their state, which varies widely, but the national median income for a family of four in 2003 was approximately $65,000, according to the Department of Health and Human Services. Those who earn more than that and can pay at least $6,000 over five years will be required to enter into a repayment plan.

In addition, the homestead exemption, which allows a debtor to protect some portion of the value of a home from creditors' claims, would be subject to a look-back period of 1,215 days prior to filing for bankruptcy. Any interest in the home in excess of $125,000 that was acquired during this look-back period would not be protected, unless the current home was bought with the proceeds of the previous home (also subject to the same look-back). Moreover, the exemption would be reduced or eliminated if the debtor were to be found guilty of certain types of criminal felonies or civil monetary judgments.

"This legislation is long overdue. It strikes a balance to help those who are truly struggling to clear their debts and get back on their feet without making bankruptcy an easy out," said House Speaker Dennis Hastert (R-Ill.). "But with this passage, the United States Congress sends a firm and resounding message to those looking to game the system--the federal bankruptcy system will no longer be a shelter for abuse."

Approximately 1 million people every year file for Chapter 7 protections, and the bill is estimated to affect between 30,000 and 100,00 filers (3 to 10 percent of those filing), according to supporters and critics, respectively.

The effective date of the bill would be 180 days after enactment, which means that the new rules could be in place by as early as the autumn of 2005.

For more information on the current rules of bankruptcy and how they interact with a comprehensive asset protection plan for your small business, check out our book, Safe Harbors: An Asset Protection Guide for Small Business Owners, available at major book sellers. New, stricter rules for debtors will be part of any bankruptcy reform, and you may want to consider what it could mean to you and your business before it's too late.

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