Time, once again, to reform the new 2005 reformed bankruptcy laws, and to reform the new reformed Chapter 7 bankruptcy? Or even the Chapter 13? On October 17 2005, amidst the highly charged atmospherics of high drama, robust promises and expectation, the new bankruptcy law, the Bankruptcy Abuse and Consumer Protection Act or BAPCPA, which had been enacted by Congress largely at the prodding of the Credit and financial industries, among other special interests, was promptly put into effect. Generally called the "reform" bankruptcy law, the law had been touted as something of a bankruptcy cure-all that was going to fix a "broken" bankruptcy system in America, most especially, reverse or drastically reduce the high volume of bankruptcy filings and the increased use of bankruptcy by American consumers in resolving their debt problem. The overarching, dominant argument and premise expressed by the banking and financial industry advocates and supporters of the reform law, and by its sponsors in the Congress, was that the growth in bankruptcy was due to "fraudulent bankruptcy filings" by consumers and the "excessive generosity" of the old bankruptcy system which, it was said, encouraged "abuse" and allowed a great many number of debtors to repudiate debts that they could quite well pay, at least in part.
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A Congressional Research Service (CRS) report on the matter summarizing the "Legislative Goals of [the] Consumer Reform," summed it up this way:
"The high volume of consumer bankruptcy filings during the 1990's fuels the argument that the current law is too lenient, i.e., 'debtor-friendly' bankruptcy. Proponents of consumer bankruptcy reform cite many reasons in its support. The legislation is intended, among other things, to make filing more difficult and thereby thwart "bankruptcies of convenience"; to revive the social "stigma" of a bankruptcy filing; to prevent bankruptcy from being utilized as a financial planning tool; to determine who can pay their indebtedness and to ensure that they do; to lower consumer credit interest rates; and, to maximize the distribution to both secured and unsecured creditors. To effect these goals, the proposals implement a "means test" to determine consumer debtors' eligibility to file under chapter 7."
That was in October 2005 that the new law came into effect. Fast forward to today in March 2009, however, only less than 4 years after the passage of the new rules of the 2005 BAPCPA law that toughened the system for bankruptcy filing and made it far more costly (it more than doubled the legal fees charged by attorneys for bankruptcy filing) for debtors to file for bankruptcy. And we find that American debtors, once again, are fast returning to the same rate of bankruptcy filing as the pre-2005 levels. And the informed expert projections are that we'll land right back pretty soon at the same old "square one" in bankruptcy filing - back to the old "bad" high pre-2005 bankruptcy filing levels which the 2005 "reform" law just enactment by Congress was meant to cure and reverse. For the month of February 2009, for example, there were over 103,000 bankruptcy filings nationally. Spread over the 19 business days of February 2009, the filing rate is 5,433 filings per day - which represents a 22.0% jump over the January 2009 filing rate, and a year-over-year increase of 29.9% as compared to February 2008. In deed, by some expert predictions, the nation will register a rate of 1.4 million bankruptcy filings for the current 2009 calendar year.
Clearly, the "reformed" BAPCPA law has woefully failed in its avowed fundamental mission and purpose - discouraging American debtors from using the bankruptcy system in settling their debt problems by making the process tougher and more expensive and hassle-filled, and reversing the escalating or high volume trend in bankruptcy filings.
WHY THE 2005 LAW FAILED
The fundamental reason why the 2005 law has come crashing down so soon, can be traced directly to one basic reason: the whole BAPCPA scheme had been based on a premise that is badly flawed, in deed false, and totally unsupported by facts or evidence or research, but based largely on mere raw emotions and ideological thinking. Essentially, Congress, while conspicuously discounting the independent research-based evidence of scholars such as Harvard's Elizabeth Warren and others (see, for example, Sullivan, Teresa A., Elizabeth Warren, and Jay Lawrence Westbrook. As We Forgive Our Debtors. New York, Oxford University Press, 1989), ultimately bought the more emotional argument of the banking and financial industries that rampant "fraud and abuse" was to blame for the high volume of consumer filing, and that to stem that tide the law needed to be made more stringent so as to curb "bankruptcy of convenience" by debtors.
That fundamental premise happens to have been totally false and grossly in error, however. At the heart of it, the notion that most American debtors file bankruptcy because though they really have the means to pay up their debts, they just do not wish to pay and merely want to cheat to get out of their debt obligation, is directly contradicted by so many studies and empirical evidence on the subject. But, even more closely today, it is directly contradicted by current events. Americans have, again, turned around and resumed flocking to the Bankruptcy courts in record numbers precisely today at a time of clearly serious national economic downturn, joblessness, financial distress and depression, for a great deal of them. Why? Because they wish to or love to cheat? Clearly, NOT that! Clearly, the 2005 reform law failed woefully to take into account the central role that the overall health and soundness of the "fundamentals," or, even more accurately, the lack of it, involved in the nation's as well as an individual debtor's economic and financial condition - his employment, overall financial obligations, etc - could often play in whether or not the debtor ultimately pays back his or her debt.
"After October, 2007 [marking the two years anniversary after the new 2005 law], there was very little 'inventory)'' of consumers ready to file for bankruptcy relief," explains Etaoin Shrdlu, one analyst on the subject, writing in Credit Slips, an online bankruptcy forum. "The Code [the bankruptcy law] changed, but the economic factors leading to bankruptcy have not. If anything, they're getting worse. [That's why] I think that within the next couple of years we'll be back at the same filing levels we had in 2003 and 2004."
Elizabeth Warren, the Harvard Law School professor and author of several books on bankruptcy, probably sums up the point best, this way:
"The credit industry did its best to drive up the cost of filing [for bankruptcy] but when families are in enough trouble they will fight their way through the paper ticket and higher attorneys' fees to get help," adding that "The word is now leaking out [once again] that the bankruptcy courts are open for business."
In sum, today, as we now see, the 2005 bankruptcy law is clearly badly flawed, if broken, right from the beginning. Congress, it's now obvious, needs urgently to completely redo this law to truly reform the egregious flaws of the 2005 "reformed" law - this time correctly, we hope.
Among many other important considerations that the new, truly "reformed" law must include, perhaps the most critical of them all is this: AFFORDABILITY OF BANKRUPTCY; finding low-cost bankruptcy. Whereas the 2005 law sought to arbitrarily restrict or exclude qualified bankruptcy candidates from filing for bankruptcy largely based on false premises by making it more difficult and expensive for them to file, such new law should provide effective mechanism that enables virtually EVERY honest American debtor, once clearly economically unable to meet the debt obligations but overburdened with debt and otherwise qualified, to have low-cost bankruptcy filings. Even finding non-lawyer pro se alternative to lawyer. American debtors should never be forced to have to forfeit their sacred constitutional right to bankruptcy as Americans, to seek the relief of bankruptcy from their debt burden and get the rehabilitative fresh start that bankruptcy offers for a life after debt - AFFORDABLY.
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