BAPCPA’s Effects on Consumer Bankruptcy Filings
By: DOUGLAS W. KASSEBAUM
June 2007
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) created a dramatic drop in the number of consumer bankruptcy cases filed nationally since the law took effect on October 17, 2005. Less clear is BAPCPA’s impact on the perceived problems it strives to address: abusive filing, consumers filing for a Chapter 7 discharge who were capable of making plan payments under Chapter 13, and opportunistic filings by consumers who incur debt intending to discharge it in bankruptcy.
Statistics
Consumer bankruptcies have seen a fivefold increase in the past 25 years, with a moderate portion of that growth in the eight years prior to BAPCPA. Between the passage of the law in April 2005 and its effective date in October 2005, consumer filings skyrocketed. Remarkably, more than 600,000 consumers filed for Chapters 7 and 13 bankruptcy between October 1 and October 17, 2005. The filing rates for calendar year 2006 show a precipitous decline in consumer bankruptcy filings.
2006 also saw a significant change in the proportion of Chapter 13 and Chapter 7 cases. In the 10 years prior to BAPCPA, only four Chapter 13 cases were filed for every 10 Chapter 7 cases. In 2006, that proportion rose to seven in 10. However, in absolute numbers, Chapter 13 filings decreased from 409,000 in 2005 to 250,000 in 2006. We cannot be certain whether BAPCPA encouraged moves from Chapter 7 to Chapter 13, discouraged Chapter 13 filings, or both.
Working with data from the first half of 2006, many commentators conjectured that the decrease in consumer filings was the natural result of the rush to the courthouse prior to BAPCPA. But the data for the second half of 2006 shows that the low filing trend is more durable than the commentators expected. Are all those consumers who are staying away from bankruptcy the abusers that BAPCPA was intended to stop?
Changes Aimed at Abusers
BAPCPA’s most publicized abuse prevention approach appears to be working. The “means test” of section 707(b) is a screening device intended to steer filers away from Chapter 7 and into Chapter 13. The means test uses an income- and expense-based formula that compares consumers’ actual incomes with state median incomes and evaluates consumers’ disposable incomes after allowance for secured debt and hypothetical expenses. The Office of the United States Trustee reviewed Chapter 7 filings from October 17, 2005 through June 30, 2006. Based on income alone, 94 percent of these filers would have automatically qualified for Chapter 7 under the means test. The U.S. Trustee determined that another 5.4 percent qualified for Chapter 7 when their expenses were taken into account. Only 0.6 percent were presumed abusive under the means test. These statistics suggest that consumers generally do not file under Chapter 7 when they will not pass the means test. However, these statistics do not tell us how much the means test contributed to the decline in 2006 filings.
Other changes may have played a role in the decline, though we lack data. For example, “serial” filers are probably discouraged by BAPCPA provisions that limit eligibility for the automatic stay which prohibits creditors from pursuing debt collection. We also do not know the overall effect of BAPCPA provisions that crack down on filers’ efforts to move to states with more generous homestead exemptions or efforts to convert non-exempt assets into homestead equity.
Finally, BAPCPA’s credit counseling requirement, intended to reduce filings by educating debtors about alternatives to bankruptcy prior to filing, has probably contributed little to the decrease in filings. The Government Accounting Office reports that “by the time most consumers receive credit counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy.” The National Federation of Credit Counseling similarly concludes that less than 4 percent of potential debtors undergoing credit counseling choose not to file bankruptcy.
Indirect Causes
Perhaps the most significant contributors to the decrease in consumer filings are uncertainty and cost. Uncertainty among consumers surrounding the availability of bankruptcy after BAPCPA likely spurred the mad dash to the courthouse in 2005 and probably persists among consumers.
BAPCPA has also made bankruptcy more expensive. Filing fees paid to the court have risen from $209 to $299 for Chapter 7 and from $150 to $274 for Chapter 13. The credit counseling requirement and financial management course required before a discharge is granted add at least $150. BAPCPA also requires more work on the part of consumer bankruptcy attorneys who must administer the means test, draft, and file additional pleadings and disclosures, and accept greater liability for the debtor’s representations regarding their financial situation. Anecdotal evidence suggests that BAPCPA has increased the cost of a consumer bankruptcy in the Twin Cities by about $1,000.
At this point it is difficult to determine to what extent the decrease in filings represents abuse prevention, how much is attributable to consumer uncertainty and higher cost, or what role has been played by external economic factors. Time will tell. What is clear is that BAPCPA has changed the world of consumer bankruptcy.