10 Years Later: What Have We Learned from BAPCPA?

Terri Haley

It has been almost ten years since the full implementation of the Bankruptcy Abuse and Consumer Protection Act (BAPCPA) in October 2005. Since that time we have seen reductions in the number of filings of consumer bankruptcies, or small business debt guaranteed with personal assets. The law, with its accompanying requirements for credit counseling (cf Sec. 106 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005), the exploration of non-bankruptcy alternatives and the requirement to explore Chapter 13 repayment plans as opposed to Chapter 7, was believed to be a fix to the steady rise in what was considered abuse of the system.

Unfortunately, those abusing the system were in the minority of filers. Most filings can be tied to a finite number of issues: Overextension or misuse of credit, unemployment or income that has been reduced, accident or long term illness, and divorce or separation. While the new law did put some controls around consumers seeking to use a bankruptcy filing “strategically”, most consumers fell into one of the “life event” scenario filings and may have been further harmed with the changes. The requirements and increase in costs hit the most economically disadvantaged consumers.

With a 2014 reporting of just over 3 trillion dollars in non-mortgage consumer debt, up from a 2006 total of 2.4 trillion, why do we see continued reduction in bankruptcy filings? Filings have increased each year but have not yet returned to pre-BAPCPA levels. The amount of reported debt may be deceiving however, as 2006 saw a significant change in the reporting of consumer debt. That was the year that student loan debt started being reported separately from other consumer debt. That change is important, because student loan debt is not normally eligible for discharge in a bankruptcy filing. What we see now is a more accurate accounting of the debt that could be eligible for bankruptcy losses. Those figures allowing for inflation and population growth do not show a significant growth in real potential loss.

The decrease in filings has been analyzed from many angles and the theories on the reasons are varied. They range from the increased costs of filing putting bankruptcy out of reach to some consumers, to the complexity of the new rules making the preferred Chapter 13 extremely difficult for consumers attempting to file Pro Se. Also possibly in play, is the overall economic improvement in tandem with the increase in availability of high risk bonds, mortgage-backed securities and collateralized debt obligations (sub-prime) which may again have put consumers with risky credit profiles in a position to borrow, increasing their debt, but potentially allowing them to put off a filing for several years.

Consumers usually file for bankruptcy when the cost of not filing outweighs the consequences of filing. With the severe economic downturn in 2007 and 2008, many consumers lost homes or jobs. Without the possibility of a wage garnishment or home foreclosure, consumers didn’t have enough to lose. However, as the economy continued to make improvements, these consumers found employment and are again at risk of garnishment. Lower income consumers again have the ability to purchase homes and want to clear up old credit items as credit is starting to flow again. As these factors become more of the norm, a number of experts foretell we will see filings increase in the next several years.

It remains to be seen if the regulatory oversight put in place, along with improvements in both the quality and availability of credit advice can truly improve the borrowing, spending and saving habits of the most “at risk” consumers.