I Missed This Anniversary — Bankruptcy ‘Reform’ Is a Year Old
Not that I would have celebrated Tuesday if I had remembered.
Here’s some of an interesting look, with clear biases in the full article, at what has happened since the law’s enactment:
Supporters of the new bankruptcy law claimed that there would be a precipitous drop in filings after the law was enacted, as those trying to evade their debts through liquidation would find the process too difficult to pursue.
Initially, that seemed to be the case, as filings dropped to slightly over 100,000 in the first quarter of 2006, as opposed to over 600,000 in the last quarter of 2005 and a year-round total of over 1.6 million.
But the statistics were measured against an abnormal spike in bankruptcies, as debtors rushed to get their petitions in before the new law took effect. Now bankruptcy lawyers and courts are noticing a slow rise in filings around the country.
True enough, but as I have mentioned a couple of times (here and here), I think filings under the new law will peak in the 800,000 per year range. Continuing:
In surveying credit counseling agencies for information on why petitioners were filing after the law, NACBA found 79 percent of those seeking credit counseling prior to filing bankruptcy were doing so due to circumstances beyond their control, such as job loss, home loss, serious medical illness, and so on.
Though it was one of the main topics at the time of the legislation, I haven’t seen any mention of reducing fraud or catching scam artists since the new law took effect. I thought all along that the fraud argument was bogus, as an FBI task force devoted to fraud got very little in the way of results after many years of trying.
One thing I didn’t expect is in a MarketWatch piece from Tuesday (requires free registration):
About 95% of consumers who filed in the eight months following the law’s effective date earn below the median income, said Clifford White, acting director of the Executive Office for U.S. Trustees, at a conference looking at the law convened Monday by the American Bankruptcy Institute in Washington.
More consumers are filing Chapter 13, under which the debtor pays back a portion of debts over a period of usually five years, instead of Chapter 7, under which a debtor can eliminate most debt. Chapter 13 filings are now about 40% of the total, compared with a historic average of 27%, according to White’s presentation.
First, I thought the new law was very clear that if you had sub-median income, Chapter 7 was the only permitted way to go. I re-read the language of the bill, and it still looks that way to me.
Nevertheless, as noted above, it appears that a lot of people are voluntarily signing on to the payments regime of Chapter 13, and that such voluntarism is being allowed. Unless they are being forced to do so by creditors (which in theory under the new law should never happen unless there is bad faith on the part of the bankrupt person or family), the high percentage of Chapter 13s is more evidence that the truth about what “reform” backers claimed, that large numbers of people filing for bankruptcy before the new law took effect were simply gaming the system, is really the opposite.
What part of the law are you reading??!? Repayment of debts is always the preferred way so no law is going to prevent it, force it under certain circumstances yes.
It is interesting that if 95% of filers are below the median and 40% are filing chapter 13, a lot of people are filing for some other reason than they feel some obligation to do so.
And what is the primary reason people file chapter 13? To save an asset…like a house…in foreclosure. In other words, the higher chapter 13 filings is not because the law encourages it, but because foreclosures have gone through the roof!
Comment by Tracy Coyle — October 19, 2006 @ 10:35 pm
I still agree with you that there weren’t a significant number of deadbeats gaming the system, though people I trust who are connected to the industry tell me that there’s more fraud going on than people realize.
That said, I agree with your basic point, that people are by and large honest and ethical, and they are choosing Chapter 13s when they can because they want to repay some part of their debts if possible. In some parts of the country, chapter 13s were on the rise even before BAPCPA.
Anyone who reads your blog knows the real numbers and can see that the economy is in way better shape than the media is letting on. I’d submit that bankruptcy rates are down because of the healthy economy and the (uneccessary, as it turns out) pre-BAPCPA flood of filings in 2005, and not being artficially suppressed by any provisions of BAPCPA itself.
Comment by Jeff Michael — October 19, 2006 @ 10:44 pm
#1, I thought it was very clear that the option to choose 13 was going to go away if you *flunked* the Means Test. I can’t cite a source, but it was all over the place at the time.
I also didn’t know you could yank a house out of foreclosure by filing for banktuptcy. Now I do. Your premise makes perfect sense (as usual).
#2 Jeff, I agree that the econ in general is in very good shape, but also think there is a core group of people that remain very vulnerable, esp certain of the uninsured for health care and those who got sucked into subprime or option ARM loans when they really couldn’t afford them.
Comment by TBlumer — October 20, 2006 @ 12:05 am
The option to file CHAPTER 7 goes away if your income is above the median and you fail the means test. I will offer some clarification on ‘failing the means test’. If you have an income above the median for your area, you must take the means test. (If your income is below the median, you do not - however an abbreviated version is used to show you are below the median) The means test has allowances for taxes, insurance, expenses and (importantly) secured debts. If these allowances reduce your net monthly income below the median, you can file a chapter 7. You can however, still file a chapter 13 if you choose or need to. (So two families with exactly the same income and exactly the same debt load - BUT, one family the debt is secured and the other only credit card - could have different results from the means test.)
I better check that I haven’t crossed the UPL line!
Comment by Tracy Coyle — October 20, 2006 @ 12:17 pm