Too Broke for Bankruptcy Protection

Can an Oak Park consumer actually be too poor to file for bankruptcy? According to a recent article from Nasdaq.com, there’s a new economic class of Americans that are “permanently insolvent.” Indeed, nearly 10 years after federal bankruptcy law reform known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), many Americans simply aren’t in a better financial position. A great deal of consumers actually appear to be worse off, as “they’re too poor to file for bankruptcy protection” given that, as a result of the reforms, the cost to file actually “quadrupled.”
Creditor Harassment and Mounting Debt
For those who have become part of the “permanently insolvent” class, do we need to rethink the bankruptcy laws in our country? As the article points out, without the possibility of bankruptcy protection, “the insolvent are endlessly harassed by creditors and are more likely to lose their homes through foreclosure.”
To be sure, debt only continues to grow while options for alleviating it evaporate. When you’re “saddled with unrelieved debt,” you’re highly unlikely to be able to “get a new credit card, most other forms of credit, or a fresh start.” For low-income Chicago residents, these limitations can be devastating, particularly given that a majority of lower income Americans have very little savings to turn to in the event of an unforeseen event, such as emergency surgery or a necessary automobile repair.
Economists from the Federal Reserve Bank of New York and Columbia University recently published a study entitled “Insolvency After the 2005 Bankruptcy Reform,” which tracks the problematic relationship between the law and the poorest Americans. According to Stefania Albanesi, the lead author of the study, “the reform has generated a substitution, from formal bankruptcy to insolvency.”
The BAPCPA and Conclusions About Insolvency
If the BAPCPA is hurting the poorest Illinoisans, should we change the way we think about bankruptcy protection? The study came to a number of conclusions about the BAPCPA, which were summarized by Nasdaq.com. Some of those conclusions include the following:
  • The BAPCPA has, by and large, helped banks, other financial institutions, and credit cards companies. According to Albanesi, “profitability has risen for credit card companies as a result of the BAPCPA.”
  • Low-income Americans have been “the most deeply damaged” by the BAPCPA. The lowest economic class is, to be sure, the “most in need of help,” but the BAPCPA only hurts by preventing those consumers from filing for bankruptcy. Albanesi indicated that the reform did result in a decline in bankruptcy filings, but it’s simply because those filings “were replaced by a sizable rise in solvency and foreclosure.”
  • In case you weren’t sure, insolvency puts a much greater strain on consumers than filing for bankruptcy protection. Albanesi explains that “insolvency is a state associated with a high degree of financial distress in comparison to bankruptcy,” and “this consequence of BAPCPA is potentially welfare reducing for households.”
Insolvency and bankruptcy are two different situations. Although they might sound the same, given that insolvent consumers as well as those filing for bankruptcy cannot pay their debts, insolvency makes it extremely difficult to recover from financial setbacks. If you have questions about your ability to file for bankruptcy, contact an experienced Oak Park bankruptcy attorney today.
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