CRS Issue Statement on Bankruptcy in a Distressed Economy

Carol A. Pettit, Coordinator
Legislative Attorney

David H. Carpenter
Legislative Attorney

Mark Jickling
Specialist in Financial Economics

Edward C. Liu
Legislative Attorney

Edward V. Murphy
Specialist in Financial Economics

Article I, Section 8 of the Constitution gives Congress power to establish uniform laws on the subject of bankruptcy throughout the United States. Two of the major purposes of the bankruptcy code—to allow overwhelmed debtors to make a fresh start and to provide for equitable treatment of creditors—are in perpetual tension. At any given moment, either debtors or lenders are likely to feel that the law favors the other group. Thus, there is constant pressure to change the Bankruptcy Code. In 2005, Congress enacted significant and controversial changes in the code with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA; P.L. 109-8). Although it included some changes involving business bankruptcies, BAPCPA has generally been viewed as having made bankruptcy less friendly to consumers. There was a surge in consumer filings just before the new law took effect in October 2005. After the new law took effect, the number of consumer filings dropped sharply, but they have risen steadily since. 

In 2009, 1.41 million non-business bankruptcy filings were reported. This is an increase of more than 30% over 2008 filings and is not far behind the filings for 2004. It is the highest number reported since BAPCPA took effect. In 2009, total business bankruptcies also increased by more than 30% over 2008 filings, with a greater proportion of those filings being under chapter 11 reorganization. Although some attribute the increases to the effects of the distressed economy, others note that filings have increased by over 30% in each year after the 2006 post-BAPCPA drop. Whatever the cause of the increase in 2009, most expect filings to continue to increase in 2010.


Date of Report: January 6, 2010
Number of Pages: 4
Order Number: IS40260
Price: $7.95

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