Let’s call a spade a spade. No matter how you look at it, the Bankruptcy Abuse Prevention and Consumer Protection Act, or BAPCPA, has been a spectacular failure. With an acronym like that, it’s no wonder. Passed in 2005, the law has not prevented bankruptcy abuse – and certainly has not protected consumers. BAPCPA was supposed to accomplish several goals in connection with consumer bankruptcies:
- It was supposed to reduce the number of people filing bankruptcy;
- It was supposed to force more people into Chapter 13 (repayment plan) rather than have them file a Chapter 7 (liquidation) bankruptcy; and
- It was supposed to provide for more payment to unsecured creditors.
The consumer bankruptcy filing statistics for the past 15 years show that passage of BAPCPA has not reduced the number of people filing bankruptcy. The years 2005, 2006 and perhaps even 2007 can be viewed in hindsight as aberrations. Beginning in early 2005 when BAPCPA was finally passed, after kicking around Congress for seven years, consumer bankruptcies began to creep upwards. The increase has been widely recognized as being caused by a fear-of-the-unknown effect of the indecipherable law. This fear was successfully used by bankruptcy attorneys to increase filings throughout 2005. Consumer – and business bankruptcy filings, for that matter – skyrocketed to an all-time high in the fourth quarter of 2005 and then plummeted to record lows in the first quarter of 2006. Now, six years after BAPCPA came into existence, bankruptcy filings have returned to pre-BAPCPA levels, as can be seen in the accompanying chart, which highlights the suspect years of 2005-07.
Nor has bankruptcy decreased as a percentage of the population. In 1996, there were 4.3 consumer bankruptcies filed for every 1,000 people living in the United States. That number increased to 6 in 1000 in 2005, the year BAPCPA passed, and dipped down to 2 in 1000 the next year. In 2011, the total number of consumer bankruptcies filed was 1,359,052, or 4.3 bankruptcies per 1000. There is simply no evidence of any long-lasting effect of a law whose language has been universally condemned and whose intricacies have continued to generate contrary bankruptcy court opinions at a rate that shows no signs of slowing.
A similar analysis can be made of whether BAPCPA forced more consumers to file Chapter 13 cases rather than Chapter 7. There is certainly anecdotal evidence that some high-earning individuals were forced into a Chapter 13 rather than filing a Chapter 7 bankruptcy. However, this phenomenon has not been statistically significant. As the accompanying chart shows, after the mid-2000s aberrations are factored out of the statistics, the ratio of consumer Chapter 7s to Chapter 13s has re-established the pre-bankruptcy equilibrium of 2 Chapter 7s for every Chapter 13 filed.
Finally, a comprehensive study co-funded by the non-partisan American Bankruptcy Institute and the National Conference of Bankruptcy Judges found that there has been no increase in the amount of money that unsecured creditors have been paid after BAPCPA was passed. The Consumer Bankruptcy Fee Study Final Report, Lois R. Lupica, Reporter, December 2011 at 64-65, Table 5 and 6.
What has increased is the amount debtors are paying to go through bankruptcy. The same study by ABI and NCBJ found that, on average, consumers are paying 24-48% more in attorneys’ fees than before the law was passed, depending on the type of bankruptcy filed. This does not include costs for the mandatory “credit counseling” that is a consumer’s ticket into bankruptcy, nor the “financial management course,” which is their ticket out, neither of which has done much to advance the law’s goals other than to add to the already high costs of filing bankruptcy.
BAPCPA has had no effect on bankruptcy filings or repayment of debt, but it has increased the cost, uncertainty and complexity of filing for bankruptcy. Given that the law took eight years to pass, and given the current political climate in Washington, there appears to be little chance of a major reform in the law, at least with regard to the consumer sections. This reality does not justify, however, our ignoring that, for whatever reason, the law has simply not worked as hoped or hyped.
Larkin Hoffman Daly & Lindgren, Ltd.