On April 20, 2005 President George W. Bush signed into law the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (BAPCA). The new law creates
rules designed to curb what many saw as abuses of bankruptcy rules, which have
allowed consumers to rack up debts and then walk away from them by filing for
Chapter 7.
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Download NowWhen it takes effect 180 days from the date it was signed, BAPCA will apply
a means test to people filing for bankruptcy protection. Debtors who earn more
than the median income in his or her state will be required to declare bankruptcy
under Chapter 13 instead of Chapter 7.
Chapter 13 requires debtors to work out a plan to repay their debts. The means
test will not apply to disabled military personnel, as long as their debts occurred
when they were on active duty.
While BAPCA is a hot topic now for bankruptcy attorneys and credit card companies,
there are some provisions of the new law that will affect Human Resources departments.
When notified that an employee has filed for bankruptcy, keep these things
in mind:
- Retirement funds continue to be protected from creditors in the event of
a bankruptcy. This applies to funds qualified under Section 401 and 403 of
the Internal Revenue Code, as well as IRC Sections 408, 408A, 414, 457, 501(a),
529, and 530.
- Retirement funds held in an Individual Retirement Account are also protected,
up to $1,000,000. This is in addition to amounts rolled over from a plan qualified
under 401 or 403(a) or (b).
- Plan loans are not dischargeable in bankruptcy as long as the loan meets
the requirements of ERISA or IRC Section 72(p). In the past, when a bankruptcy
trustee notified a plan administrator to cease loan repayments from salary,
that action put the loan into default. The loan then became a taxable distribution
to the participant, adding to the participant's financial worries. Under
BAPCA, the plan administrator can continue to make salary deductions from
the participant for loan repayments.
- The ERISA-qualified status of your plan will have an enormous impact on
the protection of participant accounts. If the plan loses its qualification,
the plan accounts could be subject to collection.
Check with your plan's attorney to make sure you're in compliance.