Consumer bankruptcy filings in the U.S. rose 14% in the first half of this year from the same period a year ago. Although consumer bankruptcy claims have declined for the past three consecutive months—the June total is down more than 7% from May—2010’s 70,117 filings to date mark the largest number of consumer bankruptcy filings since 2005. “Years of rising consumer debt and low savings rates, combined with the housing and unemployment crises, are causing bankruptcy levels not seen since the 2005 amendments to the Bankruptcy Code,” ABI Executive Director Samuel J. Gerdano said. “We expect that there will be more than 1.6 million new bankruptcy filings by year-end.”
Brief History of Bankruptcy
In its initial incarnation, bankruptcy benefited creditors, allowing them to seize the assets of a delinquent account and confine the debtor to debtors’ prison. In the United States, the Bankruptcy Act of 1898 codified the modern concept of protecting debtors from their creditors. This ethos helped shape the 1938 Chandler Act, which allowed federal bankruptcy courts to clear a debtor’s financial history and completely absolve him or her from certain obligations to creditors. Congress further articulated consumer bankruptcy law in 1978 when it distinguished between Chapter 7 filings, which completely erase a debtor’s debts, and Chapter 13 filings, which require certain debtors to make partial repayments under a structured plan. Attorney Carmen Dellutri writes that “bankruptcy is good for society because it gets the bad money off the books and out of the economy. It allows for a fresh start and gets people who were formerly shunned from the economy back into the game.” In 2005 Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act to curb a perceived epidemic in filings. This bankruptcy act raised filing fees and made it more difficult for debtors to claim Chapter 7 bankruptcy. Congress hoped this would push more people into Chapter 13 bankruptcy, and reduce the number of voluntary bankruptcies overall. However, “The laws of economic gravity are more powerful than the laws of Congress,” Gerdano said.
Bankruptcy in Economic Crisis
According to attorney Jonathan Ginsberg, the mechanism Congress installed to channel people towards Chapter 13 filings was the “means test.” He writes, “If the means test shows that you do not have sufficient disposable income to make a Chapter 13 work, then you qualify for Chapter 7. As one of the assistant United States trustees once told me, the purpose of the means test is to disqualify as many people as possible from Chapter 7, and to force them into Chapter 13. However, Chapter 13 cases often do not work because means testing and aggressive trustee arguments force debtors to agree to plans that commit debtors to pay every last dime to the trustee.” Attorney Rachel Lynn Foley writes that “as the economy continues to fall apart, creditors have become more aggressive. Creditors can no longer afford to use the same “cost of doing business” model as they once did and allow debt to be written off without question.” The current balance favors creditors to such a degree that many debtors cannot chose bankruptcy. That the current costs of filing for Chapter 7 bankruptcy are $1500, with Chapter 13 costing twice that, suggests that many more than the 70,117 Americans that have filed for bankruptcy in 2010 are need of assistance.
For more information about consumer bankruptcy, or to find a bankruptcy lawyer in your area, visit our Bankruptcy Legal Center.