Thursday, April 23, 2009

Unintended Consequences: Bankruptcy Reform

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was supposed to clean up the bankruptcy scene. Even in 2005 it was clear that the effect of the act would not be to limit lending, but to increase penalties for failures to repay debts. I suppose one rationale would have been that, fueled by the dot-com craze, people had become profligate and unwise in their spending, such that bankruptcy abuse was becoming common--hence the stiffer penalties. What about the other half of the name of the bill, consumer protection? I haven't heard a lot about that.

And now, there may have been an unintended circumstance: bankruptcies are soaring, possibly pushed along by all those who waited and tried to hold out for as long as possible.

Also, the law's test of a person's ability to pay off debts appears to have failed at one of its goals: steering debtors from Chapter 7, which allows people to sell off their assets to repay what they can and start again debt-free, and into Chapter 13, which places the filer in a repayment plan that can last for years. Chapter 7 cases accounted for 69 percent of all filings in the past year, compared with 71 percent in 2004.

So far for America being the Land of Second Chances.

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