In a recent study undertaken by professors at Columbia University, the University of Chicago, and Washington University in St. Louis, it was found that federal tax rebates caused a “significant, short-run increase” in personal bankruptcy filings, because folks had the cash to pay for the bankruptcy legal fees and the Bankruptcy Court fee of $306. They conclude that tax rebates afford folks the ability to “avoid delay” in bankruptcy filing.
The study, entitled “Liquidity Constraints and Consumer Bankruptcy: Evidence from Tax Rebates,” claims to be the first comparison of tax rebates and bankruptcy. Many non bankruptcy related studies show how tax rebates stimulate the economy because rebates put cash in the hands of a vast number of consumers. This study suggests that the effect may be even greater with respect to consumers who file for a discharge in bankruptcy: that is, after discharging debts in bankruptcy, there is a run up in consumption by consumers who now had a “fresh start” under the bankruptcy laws.
The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act made it more difficult to file for personal bankruptcy. From the creditors’ perspective, fewer people could file because of income ceilings and because the duration of time between bankruptcies was changed from 6 years to 8 years. In our opinion, from the typical consumer’s perspective, it meant simply more paperwork and more attorney verification, resulting in higher attorney fees! The Means Test requires many pages to be completed along with the Bankruptcy Petition and Schedules, but is not usually necessary. That is, the law did very little to discourage folks from filing for Chapter 7 bankruptcy protection.
The “Liquidity Constraints” study undertaken by the professors showed that after the 2001 and 2007 tax rebates there was a statistically significant increase in Chapter 7 personal bankruptcy filings. They even can show, through their analysis, that the bigger tax rebates following the 2008 rebates were correlated to the larger personal bankruptcy filings that year.
A result is that hundreds of thousands of consumers who qualify for and would otherwise file for personal bankruptcy at times when they are not receiving rebates, are unable to do so because they lack the financial resources, or have “liquidity restraints,” as the professors phrase it. Or, to rephrase it, if bankruptcy was free, there would be a significant increase in the filings.
Politicians and commentators debate the causes of bankruptcy, saying the determinants of bankruptcy are either unexpected financial crises, such as being laid off or a medical emergency verses outrageous behavior by irrational consumers. The study outlined here indicates that that is not necessarily the case. One real reason for bankruptcy is simply ability to pay the fees associated with filing.
Our practice is to attempt to make bankruptcies affordable to our clients. We charge the lowest fees possible and we allow clients to pay over time, with no interest or penalties or late payments. We can even take credit cards for bankruptcy; no we cannot take our own client’s credit card, charge the legal fee and then attempt to discharge it in bankruptcy. However, we can take a friend or family member’s credit card! Furthermore, having an experienced legal advocate assist you often results in lower overall costs when planning for a Massachusetts bankruptcy.