Bankruptcies
and the BAPCPA
How Do The New Bankruptcy Laws Affect You?
Months after the new bankruptcy law was enacted, signs showed that the law was ineffective, if not harmful. Evidence also suggested that the law’s supporters were wrong when they claimed consumers take advantage of bankruptcy as a way of fraudulently skipping out on their debt obligations.
The Bankruptcy Abuse Prevention and Consumer Protection Act was intended to eliminate the ‘deadbeats’ that take advantage of the system by racking up debt and turning to bankruptcy as an easy way out. Enacted in October 2005, the law was largely written with the help of credit card companies who complained about the money they lost as a result of bankruptcies.
When the controversial law approached its one-year anniversary, studies showed that bankruptcy rates were on the rise and could be back to their pre-reform levels in another year.
The NACBA
The National Association of Consumer Bankruptcy Attorneys (NACBA) surveyed their member attorneys and found that less than a third (31.4%) were seeing a rise in forced Chapter 13 repayment filings and two-thirds (68.5%) reported an increase in filings in the third quarter of 2006.
This survey and other studies demonstrate that most consumers are forced into filing bankruptcy because of unforeseen circumstances or situations outside their control. When asked about the factors leading consumers to file bankruptcy, attorneys reported:
- 64.0% mortgage-related debt
- 41.1% increased credit card interest rates
- 39.6% joblessness
- 33.0% medical-related expenses
- 08.1% discretionary spending (overspending)
NACBA found that most bankruptcy filers suffered legitimate financial hardships as a result of unemployment, catastrophic medical expenses, death in the family, divorce or other events outside their control.
The most significant impact the bankruptcy law appeared to have on bankruptcy is the amount of paperwork now required:
- 92.8% reported additional paperwork requirements increased costs
- 0.7% reported additional paperwork requirements improved results
These results disprove the credit industry’s claims that bankruptcy filers are spendthrifts who get credit cards for shopping sprees and then abuse the court system to get out of repaying the money they borrowed. The evidence also demonstrates the importance of debt settlement for consumers and creditors because it provides a way for consumers to repay debts based on financial ability and a way for creditors to recover funds that would otherwise be lost in bankruptcy.
The NACBA's fight
NACBA is fighting several aspects of the bankruptcy law, but they are starting by calling for Congress to overturn the credit counseling requirement of the law, which requires debtors to complete credit counseling prior to filing for bankruptcy. The idea behind this provision is that by forcing people to get counseling, it will prove that many bankruptcy filers actually have enough money to cover their essential expenses and repay creditors. Credit counseling is supposed to enlighten debtors to bankruptcy alternatives but actually just delays the inevitable.
NACBA found that of the 61,355 consumers seeking pre-bankruptcy credit counseling since the law went into effect:
97% were unable to repay debt and could not afford a debt management plan;
79% were forced into bankruptcy by events outside their control.
These results show that last minute credit counseling is an unnecessary barrier that imposes new costs and time burdens by attempting to set up unrealistic debt management plans which debtors are ultimately unable to complete.