The lobbyists for credit card companies have been successful, in some ways. Not only were they able to get Congress to pass the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), but they created the impression in many people that it was the Bankruptcy System that encouraged many people to file personal bankruptcy.
In their caricature, the average debtor spent wildly, accumulated massive debt and then would file a bankruptcy to get rid of their debt, presumably, so they could start the process all over again. So, the BAPCPA was designed to prevent this “abuse” and allow creditors to receive more of their debt back from these abusive debtors. Eight years after the BAPCPA was passed, has this happened?
Sadly, no. A recent study backed by the American Bankruptcy Institute has found that creditors have done worse under the BAPCPA. We work with many clients here in Louisville, and our experience has always been that most debtors are in bankruptcy because they are out of other options.
As the author of the study notes, “The theory that there are can-pay debtors lurking in the shadows was not confirmed by the data.” She even suggested that the credit lobby knew recoveries would not be helped, but that they wanted to create a “sweat box” for debtors that would prevent them from filing bankruptcy.
Devices like the “means test” were designed to limit debtors’ ability to file a Chapter 7, and force more into Chapter 13. The amended law also increased the cost of filing. And while these changes may make it more difficult for individual debtors, it has not increased payments to creditors.
Why? The simple answer is that individuals who file bankruptcy do so because they are financially tapped out, not because they are clever at hatching financial fraud schemes. We will leave that to Wall Street.
Source: Bloomberg, “Study Finds 2005 Code Reform Cut Recoveries: Bankruptcy,” Bill Rochelle, November 26, 2013