Exploring the Relationship Between Bankruptcy Reform, Recession, and Bankruptcy Filing Rates

Four years ago, the United States was hit with the largest recession since the Great Depression. Today, many economic analysts are still scratching their heads, desperately trying to uncover all of the contributing factors. In addition to dishonest lending practices and a lack of regulation on Wall Street, some have said that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 must share some of the blame. Here’s a brief look at how bankruptcy reform affected the recession and total bankruptcy filing rates:

2005 Bankruptcy Reform

Before 2005, creditors complained that too many people were escaping their debts by filing. At that time, people of all income levels could liquidate their debts by filing for Chapter 7. That’s why the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) added provisions that made it more difficult for debtors to file for Chapter 7 – provisions that included a higher filing cost and fewer dischargeable debts.

Global financial crisis

In the years following BAPCPA, consumers could no longer rely on bankruptcy in the same way. Instead, many people took money out of their home equity to pay off outstanding debts. Once the equity ran out, many homeowners faced foreclosure—in fact, one study found that mortgage defaults increased by 14% each year after the reform passed. This in turn led to a housing market collapse that further fueled the recession.

Number of filings

Once the recession hit, millions of people lost their jobs and were forced to file for bankruptcy. Even though the 2005 reform supposedly made it more difficult to file for bankruptcy, the number of filings went up from around 150,000 in the third quarter of 2006 to nearly 400,000 in the same quarter of 2009.

If you have any questions about bankruptcy reform and how it affects you, contact Burr Law Office. Milwaukee bankruptcy attorney Michael Burr is always up to date on the latest changes and will use his knowledge to help you get through your tough financial times. Call our office to at (877) 891-1638 to get started.