Keeping the CPA in BAPCPA

This article appeared in the January 2007 issue of The Trusted Professional, a newspaper of the New York State Society of CPAs.

Keeping the CPA in BAPCPA

By William R. Lalli, CPA, NYSSCPA Tax Policy Manager

The Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) of 2005 became effective on Oct. 17, 2005. The new law had the overwhelming endorsement of the credit card industry, perhaps because, according to the Federal Government, nearly one million Americans file for bankruptcy every year.

James Shenwick, of Shenwick & Associates—a law firm focusing its practice solely on bankruptcy, real estate and corporate law—gave a presentation to the NYSSCPA’s Closely Held and S Corporations Committee on Nov. 17, 2006, in which he outlined key, drastic changes in bankruptcy law, the industry’s motivation for the changes and the impact on the need for CPA services in this area.

Changes Ushered In by BAPCPA

Nearly half a million Americans filed for bankruptcy in October 2005 alone, probably in order to have their petition considered before BAPCPA took effect. This is an indication that, under the new law, things will not be as rosy. The 500-page law contains many details, but makes obvious two considerations:

1. There is now an increase in the cost and complications of filing for clients and their service providers.
2. There is a resultant decrease in the number of people who are eligible to file for Chapter 7 bankruptcy protection.

Shenwick explained that BAPCPA is a radical departure from previous law. For example, he said, in order to be successful in filing, debtors must provide the bankruptcy trustee with a copy of their federal tax return for the year ending before they filed their petition. Section 1308 of the Bankruptcy Code contains many new tax-return responsibilities for Chapter 13 debtors, including that all returns required for the four years ending on the petition date have been filed with the taxing authority by the day before the first scheduled meeting of creditors. In other words, more tax returns need to be filed if petitioners want to be successful in filing for bankruptcy protection—a departure from past requirements.

The debtor must provide a copy of tax returns to any creditor that requests them on a timely basis, or the Court will dismiss the case. Further, BAPCPA contains new median income tests and means tests that are complicated calculations, according to Shenwick.

Industry Support

The bill became law with the strong endorsement of the credit card and banking industries. Many of the new terms favor these BAPCPA-backers; fewer petitioners are being successful and fewer debts are being discharged.

Nearly every other element (aside from those related to tax information) of the process has become more stringent. There are new definitions of current monthly income, debt relief agencies, domestic support obligations and median family income. Credit counseling is required, and debtors must file copies of all payment advices or other evidence of payments. Changes in budgets must be filed with the Court. Moreover, a debtor must receive and file a certificate from an approved, nonprofit budget and credit-counseling agency and file a copy of the debt repayment plan.

More Potential Clients

Shenwick’s presentation made the members aware that taxpayers anticipating bankruptcy have a greater need for professional services. BAPCPA has created a need for services related to tax reporting and filing and financial planning assistance, exceeding that under previously existing law, that CPAs are uniquely qualified to provide.

While bankruptcy is something that lawmakers would hope is less frequent rather than more, the laws were designed to help taxpayers and the economy in the long term. Thus, while generated by the misery and financial failure of many, the impetus for new business and practice development for CPAs must be responded to, in the public interest.

Uncertain Future

Currently, there are several bills before Congress written to undo various BAPCPA provisions. In addition, the GAO is studying the impact BAPCPA is having on industry and the economy. For now, it is having one of its intended results: the number of filings is down overall and more debtors are filing chapter Chapter 13 petitions than Chapter 7 petitions. While the numbers are down, the need is up for competent help from attorneys and CPAs for debtors to be successful in their filing.

William R. Lalli, CPA, can be reached at wlalli@nysscpa.org.