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Bankruptcy 10 Years after the 2005 Law

It is now almost 10 years since Congress passed, and President Bush signed, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which went into effect in October 2005.  What, if any, conclusions can we find from ten (10) years of personal bankruptcies?

One conclusion is that because the Petition and Schedules are more difficult to complete, and the $335 filing fee is so large, and the complicated Means Test and the “counseling” that are required, many folks cannot participate in the process and simply become part of the class of permanently insolvent.  For this group, the consequences are the opposite of the so-called intentions of the law.  That is, the intention of giving folks a “fresh start” is lost to never-ending harassment from creditors because folks can’t file for the protection, the endlessly insolvent.  This is the conclusion of the study undertaken by the Federal Reserve Bank of New York.  The study, published in January, 2015, was in conjunction with economists at Columbia University.

Fresh Start Verses Endlessly Insolvent

What’s the difference between bankrupt and endlessly insolvent?  While filing for personal bankruptcy protection has negative consequences for your credit, getting a fresh start gives you exactly that – an ending to your current financial situation and a new beginning.  Once you have no debt following a personal bankruptcy, you can build up your credit slowly; eventually you will have solid credit and no debt.  If you can’t get a fresh start, you are taken down again and again by judgments, collection actions, court appearances, phone calls, resulting in a never ending process against you.  And you are never able to enhance your credit score.

Findings of Bankruptcy Report on Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

If you look at the first three words of the name of the law “Bankruptcy Abuse Prevention” you will see what the study determined:  credit card companies and other financial institutions have been “nourished” by the law and have earned record profits as a result of the new difficulties debtors have.  That is, there is less “Consumer Protection” and more “creditor protection” according to the report.

The analysis shows that the 2005 law has resulted in a decline in filings and a rise in insolvency.  The report substantiated the “profound difference” between bankruptcy and insolvency.  That is, the inability of the insolvent to get a “fresh start.”  Folks that could use a fresh start but are too poor to file bankruptcy end up endlessly insolvent and unable to move forward.

The study found that the average out of pocket costs for the debtor prior to the 2005 law was $600; after, $2,500.  This includes filing fees, attorney fees, credit counseling costs, and retrieving documents such as bank statements.

The law has resulted in “large and permanent reduction in bankruptcy filings,” from 1.56 million in 2004 to 597,965 in 2006 because of the difficulties in filing, not because of any fraud reduction.  This puts increased stress on low income households, according to the study.

Bankruptcy and Credit Scores

For the insolvent, their credit score plummets and never recovers; folks who file for bankruptcy protection see their credit score go up and up and, in 10 years after chapter 7 bankruptcies, have no bankruptcy on their credit report.  Immediately after a discharge by the Bankruptcy Court, you have no debt.  This actually has a positive impact on your credit score.

Personal Bankruptcy Lawyer Neil Burns

A Boston Bankruptcy Lawyer since 1985, Attorney Burns has helped hundreds of people from all over Massachusetts get a fresh start through bankruptcy.  Call for a free consultation today:  617-227-7423

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