Part II of XI
Written by Beckett Cantley and Geoffrey C. Dietrich
This article follows the outline contained in Part I, which can be read at www.cantleydietrich.com.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) is a comprehensive package of reform measures pertaining to both consumer and business bankruptcy cases. The BAPCPA made sweeping changes to the law of consumer bankruptcy, which will be the primary subject of analysis in section II of this article.
The stated Congressional intent in enacting the BAPCPA was to restore personal responsibility and integrity in the bankruptcy system and to ensure that the system is fair to both debtors and creditors. The BAPCPA was specifically implemented to combat many of the factors that contributed to the increase in consumer bankruptcy filings leading up to the enactment of the BAPCPA, such as lack of personal financial accountability, the proliferation of serial filings, and the absence of effective abuse oversight by the system.
Advocates of the BAPCPA believed that the bankruptcy system needed additional procedural and substantive barriers to make it more difficult to access the consumer bankruptcy system and to obtain debt relief. For instance, the means test (proclaimed as the heart of the BAPCPA’s consumer bankruptcy reforms and discussed in greater detail below) can convert debtors’ cases into Chapter 13, thereby requiring debtors to either develop a plan to repay creditors over the applicable commitment period (defined below) or face dismissal of their case. Advocates of the BAPCPA touted the means test as a needs-based bankruptcy relief system that uses an income and expense screening mechanism to curb perceived abuses of certain Chapter 7 debtors that had the likely ability to pay a substantial portion of their debts from future disposable income—thereby promoting personal financial accountability. Opponents of the BAPCPA argue that the means test: 1) effectively repeals the “fresh start” principle previously thought to be the core of consumer bankruptcy; 2) ignores many causes of individual bankruptcies, including job loss, family illnesses, and predatory lending; and 3) forces debtors seeking to challenge the test into costly litigation, which only drives such debtors deeper into debt. Furthermore, provisions of the BAPCPA aimed at regulating serial filers limit the abilities of debtors to obtain a discharge and/or utilize the automatic stay as a “financial timeout” from collection activity of any kind. Another major change under the BAPCPA is the requirement that attorneys conduct due diligence to check the veracity of any statement made in a petition, schedule, or motion signed by such attorney—a form of internal oversight.
Senator Chuck Grassley (R-IA), in his opening statement at a hearing on bankruptcy reform before the Senate Committee on the Judiciary, discussed the perceived abuse of the pre-BAPCPA bankruptcy system. In this opening statement, Senator Grassley stated that the vast majority of people believe that individuals who file for bankruptcy should be required to pay back some of their debts if such debtor has the means to do so. Senator Grassley continued by stating that consumer bankruptcy should be more difficult to file since “Americans have had enough . . . [and] are tired of paying for high rollers who game the current system and its loopholes to get out of paying their fair share . . . [the pre-BAPCPA] system allows wealthy people to continue to abuse the system at the expense of everyone else. People with good incomes can run up massive debts and then use bankruptcy to get out of honoring them.” The following statement from Senator Orrin Hatch (R-UT) summed up the feelings of the members of Congress that voted to enact the BAPCPA particularly well: “Bankruptcy has become a routine financial planning device used to unload inconvenient debts, rather than a last resort for people who truly need it.” Senator Grassley noted that these abuses are sometimes even promoted by greedy bankruptcy professionals who advise clients to file bankruptcy, even when the client has the ability to repay and filing bankruptcy is not in the client’s best interest, in order to profit from the filing fees. Senator Grassley suggested that these types of abuses cost every American roughly $550 in taxes in 2004, with no corresponding expenditure for the public good. Senator Grassley posited that these abuses hurt American small businesses, increase the costs of American goods and services to consumers, and cause higher rates of U.S. unemployment.
Opponents of the BAPCPA claimed that instances of fraud and abuse in the pre-BAPCPA system were rare, and that the vast majority of pre-BAPCPA bankruptcies were filed by individuals whose income was below the poverty level or related to medical expenses, job losses, or other sudden financial emergencies. An in-depth study by Harvard University medical and legal scholars, which found that more than half of bankruptcies cited medical issues as a contributing factor to bankruptcy, bolstered the claims of opponents of the BAPCPA.
In response to opponents of the BAPCPA, who claimed that most bankruptcies were driven by high medical costs and other emergencies, rather than abuses of the system, Senator Grassley pointed to statistics which showed that, prior to enactment of the BAPCPA, under one-half of all bankruptcy filers listed medical debts of any sort. Furthermore, of those bankruptcy filers who listed medical debt, each filer listed only about $5,000 of medical debt, on average. Senator Grassley stated that the medical emergency problems were overstated and that the BAPCPA, in fact, “doesn’t harm bankrupts with large medical debts.” The theory behind this statement was likely that those with true medical emergencies would have reduced income and increased expenses to the point that such debtors would pass the means test and/or have little disposable future income, if any, to repay debts under a Chapter 13 repayment plan. Furthermore, contrary to opponents’ beliefs that many bankruptcies were filed by individuals in poverty, most Congressmen believed that bankruptcy was primarily a middle-class issue—with little Congressional debate concerning the BAPCPA’s effect on the poor taking place.
Opponents of the BAPCPA also claimed that the BAPCPA was the greatest all-time victory of the banking lobbyists—harming the general interests of consumers in favor of the special interests of banks, credit card companies, and other large creditors. The BAPCPA was enacted after more than four years of costly lobbying by the credit card industry, estimated at $50 to $60 million. Banks, credit card companies, and other large lenders vehemently lobbied for these changes, particularly the means test provisions, because these companies are the ones, in general, that must ultimately bear the losses for discharges from debt in bankruptcy. The theory of the banking lobby was likely that a means test that forces debtors with disposable income into repayment plans would increase the total pool of funds available for distribution to creditors, and as long as the likelihood of repayment by debtors and the pool of funds increases by an amount greater than the cost to creditors of administering the new Bankruptcy Code, creditors would be made better off under the BAPCPA. Advocates of the BAPCPA widely claimed that its passage would reduce losses to creditors, particularly to credit card companies, and that those creditors would then pass on the savings to consumers in the form of lower interest rates.
As President George W. Bush signed the BAPCPA into law, he signaled his belief that the pre-BAPCPA bankruptcy system had become too consumer friendly, stating, “Too many people have abused the bankruptcy laws. They've walked away from debts even when they had the ability to repay them . . . . Under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts."
This is the second of eleven installments of this article. The entire article may be found at www.cantleydietrich.com.
