November 5th, 2008 by Emily Jenkins
Three years ago, Congress passed a bill that was supposed to reduce the number of personal bankruptcies in the U.S. However, the legislation has had a hard time achieving that amidst the current housing meltdown and credit crunch.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 increased the restrictions for Chapter 7 bankruptcies by introducing a “means test” that was supposed to disqualify high income filers. The thought being that those with high incomes could actually afford their debt and were abusing the legal system by filing.
Also, the Act increased the paperwork and overall complexity associated with filing for bankruptcy. The logic was to make filing much more complicated and, as a result, less attractive to consumers. In fact, the new restrictions made filing so much more complex that lawyers began charging almost double for bankruptcy cases.
The Act only increases the restrictions of Chapter 7 bankruptcy filings, hoping to push more consumers to file under Chapter 13. The difference between Chapter 7 and Chapter 13 bankruptcy filings are:
- Chapter 7 requires that your assets, except for those exempted by the state, be liquidated and given to creditors, and remaining debts are canceled; said to give consumers a “fresh start”
- Chapter 13 requires the debtor to repay at least some of the debts within five years
While the Act had some immediate success, bankruptcy filings are increasing again. And Chapter 7 filings still far outnumber Chapter 13 filings. The Administrative Office of the U.S. Courts reports that the number of personal bankruptcies filed in the federal court from June ’07 to June ’08 is 38% higher than the number filed a year earlier (for Chapter 7 filings). Chapter 13 filings are up 17% from the year earlier.
What’s worse: consumer advocates, economists, and experts predict these numbers to be even higher in 2009. A bankruptcy expert and University of Illinois law professor, Bob Lawless, predicts the total number of filings will reach 1.2 million in 2009.
Creditcards.com lists some reasons for this rise in bankruptcies:
- The economy: as unemployment rises, people losing their jobs will be unable to make their credit card payments and may look to bankruptcy as a solution
- Declining home values: in the past, consumers could rely on home equity loans as a way to pay down debt instead of bankruptcy, but home values are absolutely terrible right now
- The credit crunch: gone are the days of easy credit and living beyond our means. The financial crisis of Wall Street is trickling down. The credit is not coming easily anymore and consumers are realizing that they’ve got expenses they can’t possibly afford without it.
- Credit cards as family lifeline: the higher costs of food, gas, health care, etc. have forced many low income families to turn to credit cards as a way to make ends meet. These families cannot pay them off each month, and the story usually ends in bankruptcy.
So, the law was designed to decrease the number of bankruptcies, but for reasons like those outlined above, the numbers are still increasing. Thus, people who legitimately need to file for bankruptcy because their debts have become insurmountable now face more paperwork and complexity.
People are finding that they can’t actually afford to file for bankruptcy anymore because legal fees are significantly higher, court fees are higher, and filers are required to take debt education courses that cost money, as well. The silver lining: those who can’t afford to file for bankruptcy are probably not the people collectors will attempt to collect from, anyway.
Nonetheless, those consumers who don’t know this and can’t afford bankruptcy are starting to file on their own, without legal representation. The danger of this is that the paperwork and procedures are so much more complicated now that the average consumer will have an extremely difficult time getting through it accurately.
Consumer advocacy groups are clamoring for reform of the bankruptcy laws, but it took seven years to get the 2005 legislation passed. Congress is reluctant to open up that can of worms again. So, consumers need to be aware that filing for bankruptcy is more costly than ever and should almost always be a measure of last resort.
This entry was posted on Wednesday, November 5th, 2008 at 12:11 pm and is filed under Bankruptcy, Credit Cards, Debt Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.