Bankruptcy is no longer a financial lifeline

A year after enactment, it remains unclear how many abusive bankruptcies the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has actually prevented.  But it appears that if the legislation was designed to provide additional protection to consumers, financially-strapped Americans may have no further need for enemies.

Bankruptcy filings for the twelve months since BAPCPA’s enactment are dramatically lower—475,000 compared to the roughly 1.45 million of recent years according to the latest data from Lundquist Consulting of Burlingame, Calif. But not even the American Bankers Association (ABA), which backed the legislative changes, is celebrating yet.

“We knew [the rate would drop] immediately after enactment and expected it to increase throughout the year,” says Laura Fisher, a spokesperson for the financial services industry group.  She says it is still too early to tell what BAPCPA’s long-term impact on the filing rate will be.  The ABA expects bankruptcies will eventually level off below the recent average.

Bankruptcy attorneys are skeptical that will happen. As a group they expect filings to return to pre-BAPCPA levels during 2007, according to a recent industry survey. But everyone agrees BAPCPA disrupted the short-term trend in filing. The plummet in filings this year follows a dramatic surge in 2005.  Consumers, fearful of losing out on more favorable treatment, opted for pre-BAPCPA bankruptcy instead of waiting to see if they could address their problems outside of bankruptcy protection.  Ironically, their preemptive actions were exactly what BAPCPA attempts to prevent — filing before absolutely necessary.

But many consumers also feared they would not be able to file at all once it the law changed.

A frequently misunderstood law
“A big misperception was and continues to be that the new law abolished bankruptcy,” says David Skeel, scholar-in-residence at the American Bankruptcy Institute, an independent research group headquartered in Washington, D.C.  “It did not. We did not return to the days of debtor’s prison.  What the Act did was make the filing process harder.”

Harder not just in terms of requirements, but in also in that filing became harder to afford.

That too is an irony of BAPCPA. “Because of the increased filing costs and attorney fees, you could conceivably be too poor to file for bankruptcy,” observes Skeel.  

“Individuals are paying about twice as much in legal fees [since the work required of attorneys increased substantially] and filing fees have increased fourfold,” says Amy Boohaker, a bankruptcy attorney in Sarasota, FL. “People who are already broke are bearing the brunt of BAPCPA’s administration costs,” she adds.

But according to Fisher, the courts do have the discretion to waive some fees if warranted.

Still, it is not surprising do-it-yourself filings are on the rise.  But pursuing the do-it-yourself route has also gotten much harder and riskier.

“People do not realize they now need to go through credit counseling before they can even file,” says Skeel.  Skipping this step can result in a denial.

There are also stricter documentation and bookkeeping requirements. “The consequence of messing up the filing, submitting incomplete papers or missing a deadline is having the case thrown out," says Albin Renauer, co-author of How to File for Chapter 7 Bankruptcy. He says pre-BAPCPA there were opportunities to correct innocent mistakes.

Then there is the means test.

Renauer finds many consumers think if they fail this the test, they cannot file at all.  They can, just not under the rules known as Chapter 7. This is the filing status presumed to be the most abused since it discharges a debtor from most of their obligations.  BAPCPA was designed to discourage Chapter 7 filings in favor of Chapter 13 filings, which provide more relief to creditors.

The test’ determines whether a filer has the means — income or assets — to work out a repayment plan with creditors.  If they do not, they may proceed with a request to file under Chapter 7, otherwise they need to file under Chapter 13.  It is not a straightforward calculation, which is why Renauer created a free online calculator to help people understand their options—and that they still have options.

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