By: Donald L Swanson
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) is a bi-partisan law: enacted on a vote of 302 yaes and 126 nays in the House and on a vote of 75 yaes and 24 nays in the Senate.
2025 is the twenty-year anniversary of BAPCPA.
Here is one thing our representatives in Congress could agree upon, back in 2005. It was to assure that:
- a fresh start under Chapter 7 would only be available to the most-impoverished among us;
- our middle class consumers cannot have access to a Chapter 7 fresh start (unless their future prospects are to be among our most-impoverished); and
- our middle class consumers must, instead, pay all their projected disposable income under a Chapter 13 plan for five years.
Conclusive Presumption of Abuse
Congress, back in 2005, was more than happy to let our most-impoverished consumers get a fresh start under Chapter 7. But, “No, no, no!” Congress declared on letting middle class consumers have that same opportunity.
Congress effectuated such declaration by enacting BAPCPA in 2005—by declaring therein that a middle class consumer, with middle class prospects for the future, is conclusively presumed to be abusing the bankruptcy system by filing a Chapter 7 bankruptcy.
Why would Congress do such a thing?!
It’s especially puzzling in light of the history of bankruptcy laws in these United States.
A Radical Departure—Some History
BAPCPA is, actually, a radical departure from more than a century of prior bankruptcy laws in these United States.
Here, for example, is an explanation (from May of 1900) of Congress’s fresh start intention in enacting the first permanent U.S. bankruptcy law—in 1898:
- “The special objects kept in view by the framers of this law seem to have been: . . . 2. To provide that all bankrupts and impecunious persons, whether they have assets or not, shall obtain a discharge from their debts at a nominal expense, and thereby make it unnecessary for any man in the United States to be longer hampered by a load of debt which he is unable to pay”;
- “The principle object of the law appears to be to make discharges easy, inexpensive and certain”;
- “About one-half of the cases are of bankrupts who have no assets whatever subject to execution”; and
- No assent of creditors and no payment of any dividend is required for a discharge.
By Henry G. Newton, published in May of 1900 by Yale Law Journal, Vol. 9, No. 7 (pp. 287-296), at 287 & 290 (emphasis added).
Extending the Fresh Start Opportunity
Eight decades later, Congress extended that same fresh start opportunity for individual debtors by including middle class consumers among those eligible for Chapter 7 relief under the Bankruptcy Code (enacted in 1978).
And it was a century and seven years after the 1898 enactment, when Congress decided to eliminate middle class consumers from eligibility for a Chapter 7 fresh start—and replace it with a five-years dividend requirement under Chapter 13—by enacting BAPCPA in 2005.
A Radical Departure
BAPCPA is a radical departure from the very-long tradition of fresh start relief in bankruptcy, in which middle class folks can participate. The 2005 Congress:
- rejected that long experience;
- jettisoned middle class folks from Chapter 7 fresh start eligibility; and
- for the first-time ever, required a dividend under Chapter 13 for discharging a middle class debtor.
Why would Congress do such a thing?
History—Much the Same as Today
The experience of Henry G. Newton, as explained in his 1900 Yale Law Journal report, is not much different from what happens in bankruptcy today—middle class debtors excepted.
Here’s Newton’s explanation from May of 1900 (at 289):
- “Thus far, 105 cases have been brought before me, of which 62 have been finished and 43 are still pending”;
- “Of the 105 cases, 51 have had no assets whatever; of the 62 cases finished, only 21 had assets; in only one of them was the whole estate consumed in expenses, the amount of the estate being $42.50”;
- “of the remainder, only one of them produced dividends exceeding $1,000, the total amount of actual net assets above mortgages in the others ranging from $96.91 to $1,216.60”; and
- “In most of the estates, the nominal amount of assets was much larger, as there was much property subject to mortgage; but, in such cases, the actual amount realized by the trustee from the assets subject to mortgages was very small.”
And the discharge exceptions for individual debtors in 1900 were much the same as today’s, according to Newton (at 290):
- “The judge shall discharge the applicant unless he has (i) committed an offense punishable by imprisonment as herein provided; or (2) with fraudulent intent to conceal his true financial condition and in contemplation of bankruptcy, destroyed, concealed or failed to keep books of account or records from which his true financial condition might be ascertained.”
Concerns About Debtor Abuse
Concerns about debtors actually abusing the bankruptcy system already existed in 1900. For example (at 291):
- “It seems also to be the law that a man finding himself to be insolvent may turn his property into cash, take a trip to Europe, and enjoy himself as much as he pleases until he has spent his last dollar, then return home, and within sixty days be freed from all his indebtedness”; and
- “While this identical case has not come to hand, so far as I am informed, any referee can cite plenty of instances of that general character.”
And here’s an example of how such actual abuse concerns were playing out back in May of 1900 (at 291, emphasis added):
- “In a case now pending before the judge of this district, the referee has declined to consider the uncorroborated testimony of the bankrupt that his funds have thus been dissipated as sufficient to overcome the presumption that they are still in his hands, arising from proof that he had them a few month before the filing of the petition, and has recommended the refusal of the discharge on the ground that under this state of proof it should be found that the bankrupt is concealing assets”; and
- “The appeal of the bankrupt from the decision of the referee has not yet been decided, and the final outcome will undoubtedly awaken considerable interest among the referees and the legal profession as well as with those intending bankruptcy.”
Such actual abuse concerns were already being addressed in May of 1890 with proposed legislation (at 293, emphasis added):
- “it is proposed to have the Act amended so that no liabilities for frauds, etc., can be affected by a discharge in bankruptcy”;
- “When the proposed amendments are adopted, the provisions for a discharge will not be too liberal, and the Act will be undoubtedly be beneficial in its effects”; and
- “At present, a discharge from debts is certainly made easy.
And here’s another example (at 291-92, emphasis added) of a recommendation by bankruptcy referees for refusing a discharge:
- “the obtaining credit by a false statement in writing, whether made for the purpose of obtaining credit from the person to whom it is made, or for the purpose of being communicated to the trade”;
- “If this recommendation is adopted, it will tend to make business men more cautious as to representations to commercial agencies”;
- “In several cases before me the creditors have proved representations to commercial agencies widely varying from the facts, as to assets and liabilities, appearing in the schedules of the bankrupt, the return of the appraisers, and the reports of the trustees”;
- “It seems reasonable that one who has made written false statements to commercial agencies for the purpose of enabling him to obtain credit should not be discharged from the debts which he has thus been enabled to contract”; but
- “In the case of an oral statement, there is always more or less doubt as to the representation made, and it would cause much conflict of testimony and consume much time of referees and courts, with no certainty of a correct result, if such statements were made grounds for denying the discharge.”
And there’s more (at 292, emphasis added):
- Obligations not affected by a discharge are. 1. Taxes. 2. Judgments in actions for fraud, or obtaining property by false pretenses or false representations, or for wilful and malicious injuries to the person or property of another. 3. Debts not properly scheduled when the creditor is ignorant of the bankruptcy. 4. Debts contracted by fraud, embezzlement, misappropriation of funds, or defalcation by one acting as an officer or in a fiduciary capacity.”
Sound familiar?
Conclusion
Bankruptcy laws in these United States have always, over the past century and a quarter, been concerned with preventing actual abuses of the bankruptcy system.
But in 2005, Congress took things to an extreme: by addressing concerns over actual abuse by enacting a conclusive presumption of abuse by middle class folks with middle class prospects who file Chapter 7.
That was an unfortunate over-reaction that has harmed many middle class consumers over the past 20 years. And it’s been an economic disaster for many of those consumers who genuinely and honestly needed a Chapter 7 fresh start!
20th Anniversary!
NOTE: The year 2025 is the twenty-years anniversary of the enactment of BAPCPA. This article is the second in a series of seven articles looking back over what BAPCPA has wrought.
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.
Feed Original Url