American Bankruptcy Institute Webinar Questions Reforms

Last week, we discussed bankruptcy reform from 2005 and the position that the changes to the system did not go far enough. While some experts believe that we need to do more to consumer bankruptcies, others argue that we are not doing enough to protect debtors in need. What should we make of the bankruptcy reforms that came through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)?

According to a recent article from Bloomberg BNA, some consumer advocates believe that the bankruptcy reform measures that went into effect a decade ago may have caused “more harm than good.” To be sure, a panel of experts at a webinar held by the American Bankruptcy Institute (ABI) suggests that the overhaul to the consumer bankruptcy system “may be driving away consumers who are the most in need of the system’s protection.”

Cons of the Bankruptcy Overhaul

Some commentators emphasize that bankruptcy reform did, at least in part, what it set out to do: to lower the number of consumer bankruptcy filings. And to be sure, the total number of personal bankruptcies has declined in the U.S. over the last ten years. A recent report from Reuters, which cited a Fitch Ratings’ Report, emphasized that “ongoing stability in the labor market has U.S. personal bankruptcy filings set for a fifth straight annual decline.” The expected bankruptcy filings for 2015 will come in at about 11 percent lower than the total number reported in 2014.

But what about consumers who need bankruptcy protection and are having difficulty qualifying for Chapter 7 bankruptcy, for instance? Two panelists in particular at the ABI webinar contended that the BAPCPA “has created more obstacles for honest consumer debtors,” resulting in the inability for many Chicagoans to obtain bankruptcy protection when they need it most.

The BAPCPA was created in part to prevent wealthy debtors who did not actually need the protections of consumer bankruptcy—those who could actually afford to pay the debts they owed—from being eligible for these protections. The law aimed to prevent fraudulent bankruptcy filings. Yet according to Professor Lois R. Lupica from the University of Maine School of Law, “empirical studies have found no evidence of such widespread abuse among consumer debtors.” In other words, the law was supposed to prevent unnecessary bankruptcies, but data suggests that lower and middle-class consumer debtors were not the ones most likely to commit bankruptcy fraud.

Debtors in Need Cannot Afford Bankruptcy Protection

According to Lupica, the BAPCPA effectively makes the protections of personal bankruptcy financially unavailable to many who need them. The poorest debtors who would benefit the most from filing for bankruptcy simply cannot file. Studies confirm the rising costs of Chapter 7 bankruptcy and how this kind of protection has become cost-prohibitive under the BAPCPA. For instance, a recent study from the Federal Reserve Bank of New York reported that the median costs for debtors filing for Chapter 7 bankruptcy have risen 38 percent. With fewer needy debtors able to file, we continue to witness “a rise in the number of insolvent individuals.”

Filing for consumer bankruptcy can be an extremely complicated process. If you have questions about whether you are eligible to file for Chapter 7 bankruptcy in Chicago or whether personal bankruptcy is right for you, it is important to seek advice from an experienced Oak Park bankruptcy attorney. A consumer advocate at the Emerson Law Firm can speak with you today. Contact us to learn more about how we can assist you.

See Related Blog Posts:

Did Bankruptcy Reform Go Far Enough?

Rule to Improve Consumer Credit Access to Mortgage Market