BAPCPA at 10 Consumer Bankruptcy Trends

• Jurisdiction: United States

BAPCPA at 10: Consumer Bankruptcy Trends

Recently, the American Bankruptcy Institute (ABI) marked the tenth anniversary of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) by hosting a panel to assess the effects of BAPCPA on financially distressed consumers. The panel included Prof. Lois R. Lupica of the University of Maine School of Law in Portland, Maine, a nationally recognized scholar in the areas of consumer and commercial credit and bankruptcy law. She is also the principal investigator for the ABI Endowment's Consumer Bankruptcy Fee study and the Consumer Bankruptcy Creditor Distribution study. Also on the panel was Caralyce M. Lassner, a managing attorney at Acclaim Legal Services' Warren, Mich., office, where she represents individual consumers in chapter 7 and chapter 13 bankruptcy cases. Ms. Lassner co-chairs ABI's Consumer Bankruptcy Committee. The final panelist was Joseph S. Rubin, who is Of Counsel in the Washington, D.C., office of Arnall Golden Gregory LLP. Mr. Rubin is a 20-year public policy veteran who focuses his practice on crisis management, technology, financial services, data security, privacy, the hospitality industry and government affairs. He served as counsel to the House Judiciary Committee during development of BAPCPA. Moderating the program was Prof. Michelle M. Harner, a professor of law and the director of the Business Law Program at the University of Maryland Francis King Carey School of Law in Baltimore. Prof. Harner was ABI's Robert M. Zinman ABI Resident Scholar for the fall 2015 semester and the Reporter for the ABI Commission to Study the Reform of Chapter 11. The program consisted of a 40-minute presentation by the panelists, offered here in the form of an edited conversation.

Michelle Harner:Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, commonly referred to as "BAPCPA," in April of 2005. The provisions of BAPCPA went into effect on October 17, 2005. BAPCPA represents perhaps the most significant package of amendments to the 1978 Bankruptcy Code. A large portion of the BAPCPA provisions address consumer, or personal, bankruptcy cases under chapter 7 and chapter 13 of the Bankruptcy Code.

The purpose of today's panel is to explore the changes made by and the impact of BAPCPA on consumer cases during the past 10 years. So with that, let's jump into the panel discussion, and I think it's always prudent to start at the beginning. I would like to ask our panelists to perhaps briefly summarize what motivated BAPCPA's enactment. Mr. Rubin, would you like to kick us off?

Joseph Rubin:Sure. I worked for the House Judiciary Committee when BAPCPA was first considered. It was an eight-year odyssey. I think the things that really motivated Congress were two things. First, [there was] a skyrocketing number of consumer bankruptcies even in the face of a booming economic situation. Bankruptcies continued to climb, even though unemployment rates were low and economic growth was high. Second, there was a concern about bankruptcy abuse, and we saw instances where consumers who had the ability to repay significant portions of their debt would file chapter 7 and walk away from their debt without anything more than just a financial slap on the wrist. They would have the bankruptcy on their credit report, but they didn't actually pay.

Then we also saw instances where consumers would rack up unsecured debt. They would max out their credit cards and then file for bankruptcy days, weeks or months later and again wipe out all of that debt. The Judiciary Committee folks worked on a very bipartisan basis to try and put together a reform, again, as you pointed out, primarily focused on consumer bankruptcy — stopping consumer bankruptcy abuse — but then there were pieces that were added on: business bankruptcies and child support enforcement and things like that that needed to be updated.

Again, the primary focus was on stopping the abuse of the system, particularly by wealthy debtors. From a bipartisan perspective, the proponents were very successful. The law was considered eight times by the house, and it passed repeatedly with veto-proof majorities — over 300 votes, two-thirds of the House — and repeatedly passed the Senate with over 70 votes and often approaching 80 votes, so 80 percent of the Senate. It was a very bipartisan reform, and again eight years in the making. Members of Congress held over 30 hearings, heard testimony from 130 witnesses, and really tried to look at this from a very broad comprehensive perspective.

Michelle:Thank you Mr. Rubin. I think that inside perspective on the origins and consideration of the legislation is very helpful. Prof. Lupica, from the outside, what would you like to add about the motivation for BAPCPA's enactment?

Lois Lupica:Well, I agree with Mr. Rubin that the stated goal of BAPCPA was to reduce the number of consumer filings and, failing that, to reduce the number of consumer cases filed under chapter 7. I also recognize and agree that another declared purpose of the act was to stop the perceived abuse of the bankruptcy system by consumers who could pay their debt but instead opted to file for bankruptcy protection. A theme that ran through the congressional debate preceding BAPCPA's enactment was the suspicion that the consumer bankruptcy system was an institution that provided extravagant benefits to undeserving and opportunistic debtors.

What BAPCPA did was include many changes to the Bankruptcy Code that were designed to curtail its use and catch these so-called nefarious debtors. What empirical study has shown us, both prior to BAPCPA and since BAPCPA's enactment, is that the consumer bankruptcy system is a solution to the problem of financial distress. It's not the problem. There has never been an empirical study that has demonstrated that there has been so-called "widespread abuse" of the system by the wealthy.

On the contrary, there was a recent study — and I'm going to talk a little bit more about this later — done by two researchers at the Federal Reserve that tells us that since BAPCPA's enactment there has been a cohort of very-low-credit-score individuals who are not filing for bankruptcy because they can't afford to access the system.

Pre-BAPCPA Surge in Filings

By Ed Flynn, ABI
There was a great deal of media coverage of BAPCPA starting around March 2005, and some of it may have portrayed the upcoming changes to the bankruptcy laws as more restrictive than they actually were. The intense media coverage prompted filings by some people earlier than they would have otherwise filed. In addition, some of the extra filings may have been by people who would not have filed at all.
Bankruptcy filings had declined by about 4 percent during 2004 and based on historical patterns, were expected to fall another 10 percent during 2005. However, actual filings during March 2005 were about 15,000 above projections, and April and May saw further increases in monthly filings. June and July were somewhat quieter, but filings each month were well above projections. By the end of July 2005, filings for the year were about 122,000 above pre-BAPCPA projections.
The surge really took hold in August and September, when filings were about 174,000 cases above expected levels (see chart below). Even these increases were mild compared to what happened in the first 16 days of October, when about two-thirds of the entire pre-BAPCPA surge occurred. All told, about 862,000 more cases than projected were filed between March 1 and Oct. 16, 2005.
The six highest single days for bankruptcy filings ever occurred between Oct. 11-16, but one day stands out among all the others. On Oct. 14, 2005 (the last weekday before the effective date), there were 150,000 bankruptcy cases filed nationwide. Since about one-third of bankruptcy cases are joint filings, this means that about 200,000 individuals filed for bankruptcy in a single day — one out of every 1,100 adults in the U.S.
Chapter 7
The vast majority of the pre-BAPCPA surge involved chapter 7 cases. From March 1 through Oct. 16, 2005 chapter 7 filings were up 94 percent nationwide (see map below). In South Carolina, Utah and Puerto Rico, the increase was less than 50 percent. Texas, Vermont and Alaska each had increases of over 120 percent during this period.
Chapter 13
Chapter 13 filings were at expected levels from March through August 2005. However, in September, chapter 13 filings were about 5,000 above expected levels; during the first 16 days of October, chapter 13 filings were about 50,000 cases above projections.
Historically, about 25-30 percent of bankruptcy cases are filed under chapter 13. However, since chapter 7 cases accounted for more than 90 percent of the increased filings during the pre-BAPCPA surge, the chapter 13 mix fell to about 15 percent of filings during this period.
Chapter 11
BAPCPA had no discernible impact on chapter 11 filings, until the last few days before the Oct. 17 effective date, when about 400 extra chapter 11 cases were filed.

Michelle:I appreciate that perspective and you referencing the recent study by the Federal Reserve. I do want to get more into that, but before we talk about the impact not only of the Federal Reserve study, but the wonderful empirical work that you've done yourself, Prof. Lupica, perhaps you can give us some background on the significant changes made by BAPCPA to consumer bankruptcy laws.

Lois:Sure. Well, the most oft-discussed requirement included in BAPCPA is the means test. It mandates that all debtors calculate their income and expenses in order to qualify for chapter 7. In addition, a requirement was included that each debtor take a pre-bankruptcy filing credit counseling course, as well as a pre-discharge debtor education course. What the amendments also required is a list of necessary documents, an increased list of documents that are required in order to file and stay in the system in order to go...