WikiLeaks Document Release http://wikileaks.org/wiki/CRS-RS22511 February 2, 2009 Congressional Research Service Report RS22511 Preliminary Observations on the Impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8) Brian W. Cashell and Mark Jickling, Economics Division; Heather D. Negley, Information Research Specialist September 14, 2007 Abstract. The Bankruptcy Abuse Prevention and Consumer Protection Act, signed into law on April 20, 2005, was intended to prevent the filing of abusive bankruptcy petitions and to require debtors with regular incomes to repay as much of what they owed as possible. Overall, the perceived effect of these amendments was to make the bankruptcy code significantly more favorable to creditors. As a result, there was a "rush to the courthouse" between the date of enactment and the effective date, October 17, 2005. During that period, record numbers of consumer bankruptcy petitions were filed. During 2006, by contrast, the number of filings dropped sharply, to less than a quarter of the 2005 figure. No doubt much of the decline is explained by what happened during the transition - many consumer bankruptcies filed in 2005 were accelerated by the enactment of the new law and would otherwise have been filed in 2006 or later. At the same time, part of the slowdown may be permanent, if the new law is having its intended effect of discouraging certain types of filings. With only six quarters of data under the new law, the lasting impact is uncertain. This report examines the evidence to date, and offers some preliminary observations on the numbers and types of bankruptcy petitions filed. ¢ ¢ http://wikileaks.org/wiki/CRS-RS22511 ¢ ¢ Prepared for Members and Committees of Congress ¢ ¢ ¢ The Bankruptcy Abuse Prevention and Consumer Protection Act, signed into law on April 20, 2005 (P.L. 109-8), was intended to prevent the filing of abusive bankruptcy petitions and to require debtors with regular incomes to repay as much of what they owed as possible. Overall, the perceived effect of these amendments was to make the bankruptcy code significantly more favorable to creditors. As a result, there was a "rush to the courthouse" between the date of enactment and the effective date, October 17, 2005. During that period, record numbers of consumer bankruptcy petitions were filed. During 2006, by contrast, the number of filings dropped sharply, to less than a quarter of the 2005 figure. No doubt much of the decline is explained by what happened during the transition--many consumer bankruptcies filed in 2005 were accelerated by the enactment of the new law and would otherwise have been filed in 2006 or later. At the same time, part of the slowdown may be permanent, if the new law is having its intended effect of discouraging certain types of filings. With only six quarters of data under the new law, the lasting impact is uncertain. This report examines the evidence to date, and offers some preliminary observations on the numbers and http://wikileaks.org/wiki/CRS-RS22511 types of bankruptcy petitions filed. It will be updated as new statistics become available. ¢ ¢ Total Number of Filings .................................................................................................................. 1 Chapter 7 Versus Chapter 13 ........................................................................................................... 3 Figure 1. Nonbusiness Chapter 7 and 13 Bankruptcy Filings, 2002-2007...................................... 3 Table 1. Nonbusiness Bankruptcy Filings by Chapter, 2002-2007 ................................................. 2 Table 2. Number and Percentage of Nonbusiness Bankruptcies Filed Under Chapter 13, http://wikileaks.org/wiki/CRS-RS22511 2002-2006..................................................................................................................................... 5 Table 3. Change in the Percentage of Nonbusiness Bankruptcies Filed Under Chapter 13, for Selected States: 2002-2006..................................................................................................... 6 Author Contact Information ............................................................................................................ 6 ¢ ¢ D espite the fact that two of the longest economic expansions in U.S. history occurred during the 1980s and 1990s, the number of consumer bankruptcy filings rose sharply during those decades (and continued to rise after 2000). This paradox attracted two kinds of explanations. Some analysts detect a growing "financial fragility" among American families-- factors such as medical costs, stagnant median wages, low rates of saving, or increased dependence on two incomes are said to make households more vulnerable to financial shocks. Others argued that the bankruptcy code itself was driving up the number of filings. In this view, the existing law made it too easy for consumers to have their debts discharged (or erased) by the courts, and thus created an incentive for imprudent or even fraudulent borrowing. Behind the 2005 bankruptcy reform legislation lay "a growing perception that bankruptcy relief may be too readily available and is sometimes used as a first resort, rather than a last resort," and that the law was full of "loopholes and incentives that allow and--sometimes--even encourage opportunistic personal filings and abuse."1 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was meant to "respond to many of the factors contributing to the increase in consumer bankruptcy filings, such as lack of personal financial accountability, the proliferation of serial filings, and the absence of effective oversight to eliminate abuse in the system. The heart of the bill's consumer bankruptcy reforms http://wikileaks.org/wiki/CRS-RS22511 consists of the implementation of an income/expense screening mechanism (`needs-based bankruptcy relief' or `means testing'), which is intended to ensure that debtors repay creditors the maximum they can afford."2 The means test weighs debtors' income against their debts and living expenses according to an arithmetical formula contained in the statute.3 In general, debtors whose income--net of specified expenses and allowances--exceeds certain thresholds are not allowed to file Chapter 7 bankruptcies (where debts are discharged and consumers are free to make a fresh start) but must either file Chapter 13 petitions (under which they agree to repay part of their debts over a period of several years under a court-approved plan) or receive no bankruptcy relief at all.4 Thus, the new law, if it works as its sponsors intended, should have two effects. Consumers with steady incomes and the ability to repay, who filed Chapter 7 petitions under the old law, should be steered into Chapter 13. Second, the total number of bankruptcies should decline as "opportunistic" filings are deterred. The tables below present the data that bear on these questions. Table 1 below shows quarterly nonbusiness bankruptcy filings since the beginning of 2002. Through the first quarter of 2005, these figures show no clear trend but fluctuate at a very high level by historical standards. In the second quarter, the rush to file under the old law becomes apparent: the 458,597 filings reported were an all-time quarterly high. The record did not last 1 House Committee on the Judiciary, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, H.Rept. 109-31, part 1, pp. 4-5. 2 Ibid, p. 2. 3 See CRS Report RS22058, Bankruptcy Reform: The Means Test, by Mark Jickling. 4 In the absence of federal bankruptcy relief, creditors are free to pursue state law remedies, such as wage garnishing, to collect what is owed them. .struoC .S.U eht fo eciffO evitartsinimdA :ecruoS 7.92 725,901 162 744,952 732,963 2002 .raM 1.82 348,901 452 198,082 199,093 2002 enuJ 6.92 330,611 542 495,572 378,193 2002 .tpeS 8.92 478,411 422 725,072 926,583 2002 .ceD 2.92 920,811 242 388,582 451,404 3002 .raM 5.72 254,811 152 122,213 629,034 3002 enuJ 0.92 911,711 532 781,782 345,404 3002 .tpeS 7.92 803,411 622 915,072 450,583 3002 .ceD 9.72 939,011 082 787,582 600,793 4002 .raM 6.62 348,901 412 308,203 168,214 4002 enuJ 4.92 454,411 312 691,472 468,883 4002 .tpeS 0.03 611,901 352 815,452 098,363 4002 .ceD 4.62 646,301 102 962,982 680,393 5002 .raM 2.22 710,201 091 983,653 795,854 5002 enuJ 6.02 338,901 522 764,224 625,235 5002 .tpeS 3.41 417,39 362 456,065 336,456 5002 .ceD 8.34 413,94 121 052,36 586,211 6002 .raM http://wikileaks.org/wiki/CRS-RS22511 2.93 071,95 131 476,19 579,051 6002 enuJ 0.24 082,96 041 244,69 268,561 6002 .tpeS 5.24 250,37 431 428,89 310,271 6002 .ceD 3.93 975,37 321 956,311 163,781 7002 .raM 5.73 024,67 441 081,721 447,302 7002 enuJ latoT fo % 31 .pahC 11 .pahC 7 .pahC latoT gnidnE sa 31 .pahC retrauQ sgniliF ssenisubnoN 7002-2002 ,retpahC yb sgniliF yctpurknaB ssenisubnoN .1 elbaT nonbusiness cases were filed. In November, the figure fell to 13,643. against its usual practice, published monthly data for 2004 and 2005. In October 2005, 619,588 actually conceal how abrupt the transition was. The Administrative Office of the U.S. Courts, when the new law took effect (on October 17). Dramatic as these increases are, the quarterly data long: the number jumped to 532,526 in the third quarter and then to 654,633 in the fourth quarter, ¢ ¢ ¢ ¢ 7002-2002 ,sgniliF yctpurknaB 31 dna 7 retpahC ssenisubnoN .1 erugiF http://wikileaks.org/wiki/CRS-RS22511 .struoC .S.U eht fo eciffO evitartsinimdA :ecruoS In December 2005, the number of filings increased slightly, and the rising trend continued through June 2007. Given that the latest figures remain far below pre-2005 levels, it seems likely that the aftereffects of the rush to file triggered by the new law are still being felt. This suggests that filings will continue to rise throughout 2007. It remains to be seen whether filings will level off before they reach the levels that prevailed a few years ago under the old bankruptcy law. A major aim of the 2005 bankruptcy amendments was to steer debtors with the ability to repay into Chapter 13, where the bankruptcy court collects part of the debtor's income for a number of years and distributes it to creditors. Before 2005, about 30% of all nonbusiness cases were Chapter 13, and virtually all the rest were Chapter 7.5 In 2006 and the first three months of 2007, the Chapter 13 rate has averaged 40.7%. 5 Nonbusiness petitioners can file under Chapter 11, which is standard for corporate reorganizations. However, because of the complex and costly procedural requirements, only a few individuals use it, as Table 1 shows. ¢ ¢ The data in Table 1 illustrate that the rush to file before the effective date of the new law was in fact a rush into Chapter 7. Even though the total number of filings in 2005 set a record, the number of Chapter 13 cases declined from 2004. Clearly the message that debtors received about the new law was that Chapter 7 relief would become more difficult to obtain, and that Chapter 13 was a considerably less desirable alternative. Historically, the percentage of cases filed under Chapter 13 has varied significantly and persistently from state to state. In 2002, 29% of cases nationwide were Chapter 13, but there were five states where Chapter 13 accounted for more than 50% of all petitions. On the other hand, 10 states had rates of less than 10%.6 Tables 2 and 3 break out the 10 states with the highest and lowest Chapter 13 rates in 2002, and present data on what happened there in 2005 and 2006. Table 3 shows that the percentage decline in Chapter 13 filings reported in 2005 was greatest in the states that had the highest rates in 2002. In 2006, the percentage of Chapter 13 cases has risen above the historical norm in both high and low rate states, but the increase from 2002 to 2006 is not more pronounced in either group of states. One might have expected the primary impact of the new law to be felt in states where Chapter 13 had been relatively rare under the old law, but the data do not show this. Instead, there appears to be an across-the-board increase in the http://wikileaks.org/wiki/CRS-RS22511 percentage of cases filed under Chapter 13. As in the case of total bankruptcy filings, some of this increase is likely due to the transition experience (when the accelerated filings--and subsequent drop-off--were predominantly Chapter 7 cases), and it is uncertain how far (or whether) the Chapter 13 rate will remain permanently above the pre-reform level. 6 The "high Chapter 13" states were mostly in the south, while the "low" states were geographically dispersed, small- population states. The differences are usually explained as a result of varying court norms, or "legal culture." .struoC .S.U eht fo eciffO evitartsinimdA :ecruoS 1.31 39 117 9.4 861 444,3 0.4 97 859,1 DN 1.61 541 009 4.7 392 579,3 9.4 521 045,2 DS 7.11 745 386,4 9.4 598 452,81 0.5 675 454,11 AI 5.21 563 919,2 5.3 916 574,71 3.5 135 901,01 VW 3.61 601 056 5.4 441 381,3 2.6 731 712,2 YW 6.51 09 775 7.6 941 412,2 1.8 011 953,1 KA 7.02 623 375,1 2.5 892 307,5 1.8 393 248,4 IR 3.02 152 832,1 0.6 683 074,6 5.8 663 123,4 EM 1.21 392 624,2 3.5 616 295,11 9.8 767 185,8 MN 6.72 174 707,1 5.8 174 115,5 4.9 163 228,3 HN 5.14 034,842 569,795 0.02 223,704 412,930,2 9.82 259,344 979,635,1 .S.U latoT 9.14 776,5 845,31 2.42 438,11 238,84 5.63 217,41 013,04 JN 1.84 816 482,1 1.92 802,1 051,4 8.73 681,1 041,3 ED 5.16 416,6 057,01 6.03 600,11 420,63 8.83 762,01 164,62 AL 1.45 820,5 882,9 8.33 771,01 241,03 7.14 907,9 462,32 RA 0.95 593,02 055,43 3.13 248,63 216,711 7.64 699,53 650,77 XT http://wikileaks.org/wiki/CRS-RS22511 1.55 372,9 838,61 8.73 510,61 204,24 2.25 396,81 608,53 CN 2.66 368,21 024,91 5.04 432,91 315,74 3.25 096,12 874,14 LA 7.56 836,02 604,13 6.24 868,72 063,56 4.25 707,23 374,26 NT 0.37 414,4 740,6 5.15 319,7 253,51 7.65 738,8 575,51 CS 2.26 553,42 241,93 5.34 944,43 372,97 6.75 448,24 453,47 AG latoT fo % latoT fo % latoT fo % 31 .pahC latoT 31 .pahC latoT 31 .pahC latoT sa 31 .pahC sa 31 .pahC sa 31 .pahC etatS 6002 5002 2002 6002-2002 ,31 retpahC rednU deliF seictpurknaB ssenisubnoN fo egatnecreP dna rebmuN . 2 elbaT mjickling@crs.loc.gov, 7-7784 Specialist in Financial Economics Mark Jickling bcashell@crs.loc.gov, 7-7816 Specialist in Macroeconomic Policy Heather Durkin Negley Brian W. Cashell .struoC .S.U eht fo eciffO evitartsinimdA :ecruoS 1.9 8.0 1.31 9.4 0.4 DN 2.11 4.2 1.61 4.7 9.4 DS 7.6 1.0- 7.11 9.4 0.5 AI 2.7 7.1- 5.21 5.3 3.5 VW 1.01 7.1- 3.61 5.4 2.6 YW 5.7 4.1- 6.51 7.6 1.8 KA 6.21 9.2- 7.02 2.5 1.8 IR 8.11 5.2- 3.02 0.6 5.8 EM 2.3 6.3- 1.21 3.5 9.8 MN 2.81 9.0- 6.72 5.8 4.9 HN 6.21 9.8- 5.14 0.02 9.82 .S.U latoT 4..5 3.21- 9.14 2.42 5.63 JN 3.01 7.8- 1.84 1.92 8.73 ED http://wikileaks.org/wiki/CRS-RS22511 7.22 2.8- 5.16 6.03 8.83 AL 4.21 0.8- 1.45 8.33 7.14 RA 3.21 4.51- 0.95 3.13 7.64 XT 9.2 4.41- 1.55 8.73 2.25 CN 9.31 8.11- 2.66 5.04 3.25 LA 3.31 7.9- 7.56 6.24 4.25 NT 3.61 2.5- 0.37 5.15 7.65 CS 6.4 2.41- 2.26 5.34 6.75 AG 6002 ot 2002 5002 ot 2002 6002 5002 2002 morF egnahC etatS tnioP egatnecreP latoT fo % a sa 31 retpahC 6002-2002 :setatS detceleS rof ,31 retpahC rednU deliF seictpurknaB ssenisubnoN fo egatnecreP eht ni egnahC .3 elbaT ¢ ¢