The “Bankruptcy Abuse and Consumer Protection Act” (commonly referred to as “BAPCPA”) went into full effect in October of 2005. Bankruptcy reform in some shape or fashion had been debated by Congress for almost eight years prior to the eventual passage of BAPCPA, having made it so far as to the desk of the President where it was vetoed. In the years leading up to the passage of BAPCPA, consumer bankruptcy filings had risen steadily. The creditor lobby complained that filing bankruptcy was “too easy”, and some amount of reform was necessary. The final version was the result of a bipartisan effort, motivated by dire warnings from the wealthy creditor lobby that a failure to enact stricter bankruptcy laws would: (1) jeopardize the willingness of creditors to lend money; (2) increase the costs of borrowing for consumers due to the bankruptcy losses suffered by creditors, primarily in the credit card industry; and (3) reward reckless spending by consumers with ample ability to repay their debts.
Unfortunately, there was little statistical date to support the contentions of the creditor lobby. Probably one of the most vocal opponents of BAPCPA was Professor Elizabeth Warren of Harvard law school, the author of the “Two-Income Trap.” She correctly stated that the focus of the government should be on why the filings had increased, rather than how to stop the increase. As this is written, bankruptcy filings are again increasing towards pre-BAPCPA levels – despite the implementation of strict reforms under BAPCPA. Hopefully this article will explain why. As a preface, let me clarify that this is written based upon my own personal experience as a consumer bankruptcy attorney, and data relied on was generated by our firm.
I. Lenders are no smarter than consumers.
Look no farther than the mortgage meltdown and resulting economic crisis, of which we are still in the midst, to witness one of the primary fallacies of Bankruptcy Reform. Corporations were actually more careless and reckless than the consumers that Congress was led to believe were undermining the financial system with their alleged easy access to bankruptcy. A list of companies no longer in business since the passage of BAPCPA includes such corporate heavyweights as Bear Stearns, Countrywide…….. CITE Others are still in business only with substantial financial assistance from the federal government (or more accurately, the taxpayers) – General Motors, AIG, Freddie Mac, Fannie Mae. The fact that the federal government was propping up companies that took needless and poorly researched risks, while at the same time making bankruptcy more difficult for consumers, was not lost on many of my clients.
II. The pre-filing credit counseling requirement has only increased the cost of filing bankruptcy.
It was originally believed by some that the rising levels of consumer bankruptcy filings was due to the fact that consumers were not being educated about other alternatives to bankruptcy. As a result, BAPCPA required that a consumer debtor must receive a credit counseling certificate from an approved agency within 180 days prior to filing. If the intent of this requirement was to prevent consumers from filing bankruptcy, then it was poorly-conceived and sadly misguided. While there are occasionally non-bankruptcy alternatives to managing debt, there are many instances where a debt management plan would not provide the relief that a consumer is seeking, such as: 1.) foreclosure prevention; 2.) repossession prevention; 3.) relief from a collection lawsuit; 4.) garnishments; 5.) bank account attachment; 6.) tax liens/levies; 7.) past due child support, and 8.) student loans. Even if a consumer was trying to manage credit card debt, very rarely do they have income sufficient to meet the monthly demands of their combined creditors.
The unintended result of the pre-bankruptcy credit counseling requirement is that it has increased the time and cost necessary to file a bankruptcy. Even with the available of counseling on-line or over the telephone, the costs can still range as high as $75 for a couple, or $50 for an individual. In essence this becomes a de facto filing fee increase, at a time when most consumers are already struggling. In addition, the time necessary to fulfill the requirement could potentially delay the filing of a bankruptcy in time to stop a foreclosure or repossession. While it does appear that some consumers are deriving a benefit from the “debtor education” course required to exit a bankruptcy, there appears to be little deterrent value to the pre-filing requirement.
III. Making bankruptcy more difficult would decrease the cost of credit – and increase the availability of credit – for consumers who were responsible in managing their debt.
This is another supposed goal of BAPCPA which was not quite delivered as expected. It is true that consumer lending in the 18 months following the enactment of BAPCPA was more available, and to a wider range of consumers, than any time in recent history. However, the increase in lending was not motivated by the restrictions on bankruptcy imposed by BAPCPA, but instead on the catastrophic relaxation of lending standards by the banking community at large. The proliferation of sub-prime mortgages, adjustable rate mortgages, and other alternate forms of lending, with little private or public oversight, eventually catapulted our economy into a recession from which we are yet to emerge.
Now lenders are demanding stricter documentation for extending loans, which is appropriate in most cases. But many small businesses, with spotless payment histories, lost credit lines, floor plans, and other credit access that they relied on for their month-to-month operations. Credit card companies began proactively raising rates on customers who were deemed “default risks”, even if they had never missed a payment on the account. Homeowners with credit beyond reproach were denied the opportunity to refinance, or if allowed to refinance, only at a higher rate. Even now, with the economy still in recession, the big banks are posting large quarterly profits, while the American consumer struggles on.
IV. Filing bankruptcy was too easy.
I always disagreed with this argument used by those in favor of bankruptcy reform, but I do believe that some of the requirements imposed by BAPCPA have been fruitful. Specifically, the requirements that consumers must accurately disclose and document their income, and be current in their tax return filings, are appropriate when seeking the relief that the Bankruptcy Courts offer. However, many jurisdictions such as South Carolina, already imposed this requirement as part of their local procedure even before it became part of BAPCPA. But to say that filing bankruptcy was “too easy” overlooks several components of the bankruptcy process:
- Causes of filing
There are four general factors that can usually be attributable to the financial distress that may necessitate a bankruptcy filing: 1) Employment issues such as job loss, job change, or reduction in income/hours; 2) Medical issues, including emergencies, chronic health problems, or care for an ill/disabled family member; 3) Domestic issues, such as divorce, separation, and loss of child support and 4) Mismanagement or overextension. It is not uncommon for 2 or more causes to be present, as health problems may lead to job loss, or the unemployment of a divorced parent may lead to their inability to pay child support for their children. While those who are guilty of overextension or “living beyond their means” may have been the target for the proponents of the law change, they are easily the minority. Yet all filers bear the burden of the BAPCPA changes.
2. Consequences of filing
Probably the most overlook consequence of financial distress is the emotional and physical toll that it exacts upon a consumer. Bankruptcy is truly a “last resort”, as consumers put their lives on hold and assets at risk, all in the pursuit of much-needed relief. Consumers subject themselves to the jurisdiction of the bankruptcy court, and are required to disclose significant personal and private information for review by the bankruptcy trustee, as well as any creditors or interested parties. The immediate result of the bankruptcy filing will be to inhibit, or make impossible, the extension of new credit to the consumer. It will appear on the consumer’s credit report as a public record for 10 years. While the Bankruptcy Code prohibits discrimination against an individual based on a bankruptcy filing, disclosure of a bankruptcy filing will often be required for any employment application or background check conducted in the years following a bankruptcy filing.
3. Enforcement mechanisms
While the Bankruptcy Reform Act added many more enforcement mechanisms to bankruptcy process, many of those were redundant. Prior to BAPCPA, the United States Trustee’s Office was charged with the supervision of all cases filed under the Bankruptcy Code. This authority included the ability to seek the dismissal of consumer cases for “substantial abuse” – cases that had components of fraud or bad faith. This authority still exists under the BAPCPA, but “substantial abuse” review has been condensed for the most part into a rigid, formulaic calculation which focuses on projected income and expenses. The new formula can penalize consumers who have been financially careful, and minimized their debt burden by driving older cars and living in a modest home, while rewarding consumers who have leveraged all of their assets, and have high transportation and housing expenses.
In addition to the scrutiny afforded the United States Trustee, all consumer debtors must appear in court and be questioned by the case trustee about their bankruptcy petition and financial affairs. The testimony is given under oath, and is recorded. Creditors are invited to attend the hearing, and may question the debtors as well. This requirement has not changed since the passage of BAPCPA. Likewise, creditors still have the same rights to object to the filing of a bankruptcy case as they did before passage of BAPCPA. This was often overlooked in the debate leading up to the passage of BAPCPA. Creditors simply wanted to shift the time and expense of policing debtor conduct over to the United States Trustee’s Office.
As the common maxim goes, “the more things change, the more they remain the same”. The restrictions and requirements imposed on the honest and unfortunate debtors seeking refuge in the bankruptcy court have increased dramatically. The costs associated with the filing of bankruptcy by consumer debtors have also increased. The promised societal benefits to be extended by the lending industry in the wake from passage of BAPCPA (increased availability of lending, lower interest rates) have failed to emerge. Yet the root causes of financial distress for American consumers remain, diagnosed but untreated: divorce, unemployment and health issues. Likewise, the corporate behavior of the lending industry has not changed. Reckless risk with little consequence for failure continues to an ongoing trend in corporate America. Meanwhile, the American consumer labors under the threat of immediate and irreparable consequences for financial failure, regardless of the attempts made to avoid such risk.