By: Donald L Swanson
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”):
- “A person who had a heart attack is treated the same as someone who had a spending spree at the mall”; and
- So, BAPCPA created a “worsening of the value” of bankruptcy as a means of protecting middle class families from economic catastrophes.[Fn.1]
BAPCPA’s Deterrence Goal—A Huge Success
Congress enacted BAPCPA with this explicit goal:
- to deter bankruptcy filings by middle class families who can repay their debts; and
- to do so by excluding all middle-class families from Chapter 7 and forcing them into Chapter 13 (i.e., to limit bankruptcy’s most-generous provisions to only the most-impoverished among us).
BAPCPA was hugely successful in its goal of deterring bankruptcy filings. It caused:
- a net reduction of more than a million bankruptcy filings in the two years after implementation; and
- a sustained reduction in all bankruptcy filings thereafter by middle class families, under the new bankruptcy regime.
But such success came at a cost.
Unintended Consequences
The Bankruptcy Code was enacted in 1978. One purpose was to help consumers protect themselves from economic catastrophes.
In 2005, BAPCPA was sold as a way to reduce filings under the Bankruptcy Code . . . but in a targeted way:
- to keep only “abusive” filers (i.e., those who could repay their debts) out of bankruptcy; but
- it pursued that goal by pushing all middle class folks out of Chapter 7 and into Chapter 13.
The study identified in Footnote 1 below (titled, “The Economic Consequences of Bankruptcy Reform”) shows:
- the bankruptcies deterred by BAPCPA were not limited to the most “abusive” filings; and
- BAPCPA reduced significantly the value of bankruptcy as a way to protect middle class families from economic catastrophes.
An Unmitigated Failure
BAPCPA’s idea of making middle class families file Chapter 13, instead of chapter 7, has been an unmitigated failure for middle class families facing economic catastrophes.
That failure exists because of the incapacity of Chapter 13 to help such middle class families deal with their economic catastrophes. That incapacity arises from problems within the Chapter 13 system that BAPCPA created.
One problem is various unworkable requirements of Chapter 13, such as this:
- debtors must forfeit to creditors all their future disposable income . . . for five years; and
- five years is very a long time for a debtor to have no available funds for facing another economic difficulty or catastrophe or a spike in inflation.
A further problem is the complexity of the Chapter 13 system created by BAPCPA. Under that system, middle class families:
- have difficulty meeting its requirements; and
- can’t afford the legal fees required to navigate the complexity.
Hospitalization – An Example
Hospitalization is one example of an economic catastrophe for a middle class families.[Fn. 2]
The “Economic Consequences” study identified in Footnote 1 below focuses on the universe of uninsured hospitalizations between 2003 and 2007 in California, where approximately 20 percent of residents lacked insurance during that time.
The study finds that BAPCPA has “clearly decreased the overall number” of bankruptcy filings (both Chapter 7 and Chapter 13) following a hospital admission.
However, the study also finds that BAPCPA created an unintended consequence: a worsening of the value of the bankruptcy option for protecting middle class families from economic catastrophes:
- economic catastrophes, like medical costs, are the type of things that make “fresh start” bankruptcies (i.e., under Chapter 7) valuable—but middle class families are excluded from Chapter 7 by BAPCPA; and
- Chapter 7 bankruptcy may be the only mechanism by which middle class families (who can’t make Chapter 13 work) can protect themselves against economic catastrophes.
Conclusion
BAPCPA is a huge success at its stated purpose of keeping middle class families out of bankruptcy in general and out of Chapter 7 in particular.
But BAPCPA is an unmitigated failure at another part of its stated purpose: of preventing only “abusive” bankruptcy filings.
What BAPCPA actually did is this: it eliminated, for all practical purposes, the bankruptcy option for many middle class families who face economic catastrophes.
20th Anniversary!
NOTE: The year 2025 is the twenty-years anniversary of the enactment of BAPCPA. This article is the third in a series of seven articles looking back over what BAPCPA has wrought.
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Footnote 1. These quotes (emphases are added) and information in this article are from a study titled, The Economic Consequences of Bankruptcy Reform, by Tal Gross, Raymond Kluender, Feng Liu, Matthew J. Notowidigdo & Jialan Wang, published in Vol. 111, No. 7, pp. 2309-41 (July 2021).
Footnote 2. Other examples include, divorce, job loss, and unplanned pregnancies.
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