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Tuesday, September 21, 2010

Observations on the Impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8)

Mark Jickling
Specialist in Financial Economics

Jared Conrad Nagel
Information Research Specialist

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA; P.L. 109-8), in response to rising numbers of personal bankruptcy filings. BAPCPA was intended to prevent abusive or opportunistic bankruptcy petitions and to require debtors with regular incomes to repay at least part of what they owed. The number of bankruptcies dropped in the short-term, but recent data suggest that the effect of BAPCPA was transient.

The premise of BAPCPA was that the old bankruptcy code was too lenient to debtors and encouraged opportunistic or abusive filings. In 2006, the year after BAPCPA was enacted, the number of filings fell to less than a quarter of the 2005 figure. Since 2006, however, the number of filings has risen steadily, and in the first half of 2010 returned to pre-BAPCPA levels.

Another aim of BAPCPA was to encourage Chapter 13 petitions (where debtors repay creditors out of future income, under a court-approved plan) rather than Chapter 7 (where the debtor’s assets are liquidated and certain debts are discharged, or erased, leaving the debtor free to make a fresh start). In 2006, the proportion of Chapter 13 cases rose sharply, but 2010 statistics show that the breakdown between Chapters 7 and 13 has reverted to pre-BAPCPA norms. In some states, however, this is not the case—several states where Chapter 13 was rare before BAPCPA now have significantly higher rates, but these are generally low-population states that have little impact on the national average.

It may be that the recession that began in December 2007 and the slow recovery have skewed the latest figures, but the record of the past three decades does not support a presumption that recessions have dramatic or long-lasting effects on bankruptcy trends.

Date of Report: September 14, 2010
Number of Pages: 10
Order Number: R41414
Price: $29.95

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