Andrew P. Macarthur, Pay to Play: the Poor's Problems in the Bapcpa

• Jurisdiction: United States,Federal
• Publication year: 2011
• Citation: Vol. 25 No. 2

PAY TO PLAY: THE POOR'S PROBLEMS IN THE BAPCPA

Andrew P. MacArthur^*

ABSTRACT

One-third of all bankruptcies are filed by individuals whose income is below the poverty level. When Congress debated the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), most senators felt that the BAPCPA was mainly "a middle-class issue," leading to little debate involving the effects on the poor. Unfortunately, the BAPCPA harms the poor both procedurally and substantively. The BAPCPA's additional fees and increased paperwork make bankruptcy access for the poor more difficult than for other classes, especially as fewer attorneys are likely to take their cases. Even if the poor are able to access the bankruptcy system, they are likely to be denied a fresh start. The new substantive provisions limiting the automatic stay, increasing notice burdens and domestic support obligation costs, and imposing stricter requirements in chapters 7 and 13 all shift the balance of power towards creditors. The BAPCPA's impact on the poor is even more acute considering the current financial crisis may leave bankruptcy as their only alternative to economic collapse.

INTRODUCTION .............................................................................................. 409

I. BACKGROUND .................................................................................... 411

II. THE POOR CLASS ................................................................................ 415

III. PROCEDURAL BARRIERS ..................................................................... 419

A. Additional Filing Requirements and Costs ................................. 419

B. Pre- and Postfiling Hurdles: Credit Counseling, Financial

Management Course, and Auditing ............................................. 425

1. Credit Counseling Mistake ................................................... 425

2. Financial Management and Random Audits Increase

Costs .................................................................................... 432

C. Fewer Attorneys ......................................................................... 433

D. Lack of Fee Waiver and Increased Filing Fees .......................... 438

IV. SUBSTANTIVE PROBLEMS ................................................................... 440

A. The Automatic Stay Does Not Automatically Save a Debtor's

Residence .................................................................................... 440

B. The Notice Required to Creditors Is Burdensome ...................... 448

C. Changes in Domestic Support Obligations Will Decrease

Capital ........................................................................................ 450

D. Chapter 7 Problems .................................................................... 455

1. The BAPCPA Will Likely Lead to Abuse of Reaffirmation

Agreements ........................................................................... 455

2. Eliminating the Ride-Through Will Reduce a Debtor's

Ability to Pay Debt ............................................................... 462

E. Chapter 13 Problems .................................................................. 465

1. Decreased Cramdown Protection Means Fewer

Resources to Pay Debt ......................................................... 465

2. Nondischargeability of Student Loans Will Be an

Economic Burden ................................................................. 468

3. A Confirmation Plan Will Be More Difficult to Obtain ........ 473

V. POLICY IMPLICATIONS ........................................................................ 476

A. Fresh Start May Be a Myth, but the BAPCPA Removed any

Reprieve ...................................................................................... 476

B. Credit Will Still Be Available After the BAPCPA ....................... 478

CONCLUSION .................................................................................................. 483

INTRODUCTION

Some believe that the poor¹do not file for bankruptcy because creditors will not extend credit to people who pose a high risk of default or are likely to be judgment proof.²However, the poor can use bankruptcy to preserve necessities such as utility service and subsidized housing.³When Congress debated the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"), most senators felt that the BAPCPA was mainly "a middle-class issue," leading to little debate involving its effects on the poor.⁴For example, some Senators believed that the poor had a "safe harbor" from the means test⁵to enter chapter 7 without being forced into the more difficult and costly chapter 13.⁶Unfortunately, they were wrong about that and the BAPCPA being only "a middle-class issue."

Numerous articles have been written discussing how the BAPCPA has affected everything from homeownership,⁷debtor's counsel,⁸rural persons,⁹ single mothers,¹⁰family law matters,¹¹the credit card industry and consumers,¹²small businesses,¹³judges' discretion,¹⁴and chapter 7 trustees,¹⁵to the impact of the BAPCPA on automobile lenders.¹⁶However, very little, if any, scholarship has exclusively focused on how the BAPCPA affects the poor.¹⁷This is surprising when one considers that one-third "of all bankruptcies take place from people who have income below the poverty level."¹⁸This Article seeks to fill that void in scholarship by examining how the BAPCPA has significantly reduced the access and utility of the bankruptcy system for the poor¹⁹in a financial time²⁰where bankruptcy filings in general have increased in 2008 approximately twenty-nine percent over a one-month period from a year ago.²¹

Part I provides a background on the BAPCPA. Part II describes the class of poor individuals forming the focus of this Article. Part III discusses new procedural barriers blocking the poor from accessing the bankruptcy system, including additional filing requirements, fewer attorneys, and increased filing fees. Part IV analyzes the substantive issues within the BAPCPA affecting the poor, including fewer automatic stays, more burdensome notice requirements, additional domestic support obligation costs, and new problems under both chapters 7 and 13. Part V addresses the policy implications of the BAPCPA and their affect on the poor, such as a loss of reprieve from debt. The Article concludes by summarizing how the BAPCPA will harm the poor both procedurally and substantively.

I. BACKGROUND

Bankruptcy is "[a] statutory procedure by which a (usu[ally] insolvent) debtor obtains financial relief and undergoes a judicially supervised reorganization or liquidation of the debtor's assets for the benefit of creditors . . . ."²²The Supreme Court has recognized that bankruptcy provides a debtor with a fresh start,²³which is "a new opportunity in life . . . unhampered by the pressure and discouragement of preexisting debt."²⁴

Most debtors require this fresh start because of medical reasons, divorce, employment loss, or some combination of the three.²⁵Bankruptcy provides a debtor with many economic benefits, such as the ability to stop collection efforts and retain property,²⁶discharge monetary obligations,²⁷and have property exempted²⁸(or keep basic assets) necessary for the debtor's fresh start.²⁹

When filing for bankruptcy, a debtor has four options. The debtor can liquidate under chapter 7,³⁰reorganize under chapter 11,³¹or have his or her

Id. debt adjusted under chapter 12 (for family farmers with regular income) or chapter 13 (individuals with regular income).³²Because chapter 11 is costly and complex,³³and chapter 12 is for "financially distressed family farmers,"³⁴most individuals will file under either chapter 7 or chapter 13.³⁵

In 2005, Congress significantly amended the Bankruptcy Code by enacting the BAPCPA.³⁶The stated purpose of the BAPCPA was to "improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and

Id. creditors."³⁷President George W. Bush, in signing the 500 pages³⁸of the BAPCPA into law, stated that the pre-BAPCPA bankruptcy system was being used to discharge payable debt causing credit to be less accessible and affordable, "especially for low-income workers who already face financial obstacles."³⁹

BAPCPA amended the Code to prevent this alleged abuse.⁴⁰Specifically, the BAPCPA added additional filing requirements. For example, a credit counseling certificate became a prerequisite to file for chapter 7 or chapter

13,⁴¹and a financial education course certificate became a condition to discharge debts in chapters 7 and 13.⁴²Attorneys are now potentially liable for any errors in the debtor's documents,⁴³and a means test was added to determine a debtor's eligibility for chapter 7.⁴⁴Congress enacted provisions to prevent repeat filing⁴⁵and decreased the number of automatic stays available,⁴⁶ allowing creditors to repossess debtors' property more easily. These provisions are just a few examples of how the Bankruptcy Code changed after the BAPCPA and demonstrate why some have labeled the BAPCPA the most significant legislation since the Bankruptcy Code was enacted.⁴⁷Before addressing how these and other provisions of the BAPCPA have affected the poor, it is important to first understand the poor class under analysis in this article.

II. THE POOR CLASS

Studies demonstrate that most who enter bankruptcy are not chronically poor or in abject poverty,⁴⁸but are mainly in the middle class⁴⁹when categorized by attributes other than income, such as education, occupation, and homeownership.⁵⁰A 2001 study by Elizabeth Warren found that eight percent of individuals filing bankruptcy could be classified as chronically poor.⁵¹

Warren performed two earlier studies and concluded that poor debtors in bankruptcy are mainly middle class if analyzed based on attributes other than income.⁵²Properly categorizing the poor class as those chronically poor versus...