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Consumer bankruptcies fell dramatically after the passage of bankruptcy reform legislation in 2005, but personal bankruptcies are rising once again.
The increasing trend is due primarily to two factors: economic conditions are worsening; and consumers are becoming more aware that the 2005 legislation does not prevent them from using the bankruptcy laws to improve their debt situation.
There were a total of 2,039,214 non-business bankruptcy filings in the U.S. in 2005. After the bankruptcy reform legislation went into effect in the fall of 2005, total non-business bankruptcies dropped to only 597,965 in 2006, but rebounded to 822,590 in 2007, and the upward trend is continuing into 2008. Non-business filings in the first quarter of 2008 totaled 236,982, up from 187,361 in the same quarter one year ago. The same trend is evident in the state of California and here in the Northern Bankruptcy District.
There were two primary goals the Republican led Congress wanted to achieve with the 2005 legislation, which was passed in response to the powerful credit card lobby. First, they wanted to discourage the public from filing for bankruptcy. The statistics indicate that the reform was effective in achieving this goal, at least for the time being.
Secondly, Congress wanted to pressure those who did file for bankruptcy into filing under Chapter 13 instead of Chapter 7. In a Chapter 13, unsecured creditors, such as credit card companies, stand a better chance of receiving some payment as opposed to Chapter 7 where they generally receive nothing. Congress did this through imposing a "means test" which a consumer must pass before he or she is eligible to file under Chapter 7.
Prior to the enactment of the new legislation, the percentage of total consumer filings that were filed under Chapter 7 varied, but usually hovered around 70% of total consumer filings. In 2006, the percentage of consumer bankruptcy filings under Chapter 7 dropped to only 58%, but increased to 61% in 2007, and to 64% in the first quarter of 2008.
What does all this mean? It likely means that all of the press surrounding the 2005 legislation did discourage the public from filing for bankruptcy. However, several years later, the system as a whole and the public are adjusting to the changes and bankruptcy is once again becoming a popular and effective tool for consumers in financial crisis.
