Preliminary Observations on the Impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8)

Preliminary Observations on the Impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8)

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The Bankruptcy Abuse Prevention and Consumer Protection Act, signed into law on April 20,
2005 (P.L. 109-8), was intended to prevent the filing of abusive bankruptcy petitions and to
require debtors with regular incomes to repay as much of what they owed as possible. Overall, the
perceived effect of these amendments was to make the bankruptcy code significantly more
favorable to creditors. As a result, there was a “rush to the courthouse” between the date of
enactment and the effective date, October 17, 2005. During that period, record numbers of
consumer bankruptcy petitions were filed.
During 2006, by contrast, the number of filings dropped sharply, to less than a quarter of the 2005
figure. No doubt much of the decline is explained by what happened during the transition—many
consumer bankruptcies filed in 2005 were accelerated by the enactment of the new law and would
otherwise have been filed in 2006 or later. At the same time, part of the slowdown may be
permanent, if the new law is having its intended effect of discouraging certain types of filings.
With only six quarters of data under the new law, the lasting impact is uncertain. This report
examines the evidence to date, and offers some preliminary observations on the numbers and
types of bankruptcy petitions filed. It will be updated as new statistics become available.
˜—?›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ

›Ž•’–’—Š›¢ȱ‹œŽ›ŸŠ?’˜—œȱ˜—ȱ?‘Žȱ –™ŠŒ?ȱ˜?ȱ?‘ŽȱŠ—”›ž™?Œ¢ȱ‹žœŽȱ›ŽŸŽ—?’˜—ȱ
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Total Number of Filings .................................................................................................................. 1
Chapter 7 Versus Chapter 13 ........................................................................................................... 3

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Figure 1. Nonbusiness Chapter 7 and 13 Bankruptcy Filings, 2002-2007...................................... 3

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Table 1. Nonbusiness Bankruptcy Filings by Chapter, 2002-2007 ................................................. 2
Table 2. Number and Percentage of Nonbusiness Bankruptcies Filed Under Chapter 13,
2002-2006..................................................................................................................................... 5
Table 3. Change in the Percentage of Nonbusiness Bankruptcies Filed Under Chapter 13,
for Selected States: 2002-2006..................................................................................................... 6

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Author Contact Information ............................................................................................................ 6

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espite the fact that two of the longest economic expansions in U.S. history occurred
during the 1980s and 1990s, the number of consumer bankruptcy filings rose sharply
D during those decades (and continued to rise after 2000). This paradox attracted two kinds
of explanations. Some analysts detect a growing “financial fragility” among American families—
factors such as medical costs, stagnant median wages, low rates of saving, or increased
dependence on two incomes are said to make households more vulnerable to financial shocks.
Others argued that the bankruptcy code itself was driving up the number of filings. In this view,
the existing law made it too easy for consumers to have their debts discharged (or erased) by the
courts, and thus created an incentive for imprudent or even fraudulent borrowing. Behind the
2005 bankruptcy reform legislation lay “a growing perception that bankruptcy relief may be too
readily available and is sometimes used as a first resort, rather than a last resort,” and that the law
was full of “loopholes and incentives that allow and—sometimes—even encourage opportunistic
personal filings and abuse.”1
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was meant to “respond
to many of the factors contributing to the increase in consumer bankruptcy filings, such as lack of
personal financial accountability, the proliferation of serial filings, and the absence of effective
oversight to eliminate abuse in the system. The heart of the bill’s consumer bankruptcy reforms
consists of the implementation of an income/expense screening mechanism (‘needs-based
bankruptcy relief’ or ‘means testing’), which is intended to ensure that debtors repay creditors the
maximum they can afford.”2
The means test weighs debtors’ income against their debts and living expenses according to an
arithmetical formula contained in the statute.3 In general, debtors whose income—net of specified
expenses and allowances—exceeds certain thresholds are not allowed to file Chapter 7
bankruptcies (where debts are discharged and consumers are free to make a fresh start) but must
either file Chapter 13 petitions (under which they agree to repay part of their debts over a period
of several years under a court-approved plan) or receive no bankruptcy relief at all.4
Thus, the new law, if it works as its sponsors intended, should have two effects. Consumers with
steady incomes and the ability to repay, who filed Chapter 7 petitions under the old law, should be
steered into Chapter 13. Second, the total number of bankruptcies should decline as
“opportunistic” filings are deterred. The tables below present the data that bear on these
questions.
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Table 1 below shows quarterly nonbusiness bankruptcy filings since the beginning of 2002.
Through the first quarter of 2005, these figures show no clear trend but fluctuate at a very high
level by historical standards. In the second quarter, the rush to file under the old law becomes
apparent: the 458,597 filings reported were an all-time quarterly high. The record did not last

1 House Committee on the Judiciary, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, H.Rept.
109-31, part 1, pp. 4-5.
2 Ibid, p. 2.
3 See CRS Report RS22058, Bankruptcy Reform: The Means Test, by Mark Jickling.
4 In the absence of federal bankruptcy relief, creditors are free to pursue state law remedies, such as wage garnishing, to
collect what is owed them.
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long: the number jumped to 532,526 in the third quarter and then to 654,633 in the fourth quarter,
when the new law took effect (on October 17). Dramatic as these increases are, the quarterly data
actually conceal how abrupt the transition was. The Administrative Office of the U.S. Courts,
against its usual practice, published monthly data for 2004 and 2005. In October 2005, 619,588
nonbusiness cases were filed. In November, the figure fell to 13,643.
Table 1. Nonbusiness Bankruptcy Filings by Chapter, 2002-2007
Nonbusiness Filings
Quarter
Chap. 13 as
Ending
Total
Chap. 7
Chap. 11
Chap. 13
% of Total
June 2007
203,744
127,180
144
76,420
37.5
Mar. 2007
187,361
113,659
123
73,579
39.3
Dec. 2006
172,013
98,824
134
73,052
42.5
Sept. 2006
165,862
96,442
140
69,280
42.0
June 2006
150,975
91,674
131
59,170
39.2
Mar. 2006
112,685
63,250
121
49,314
43.8
Dec. 2005
654,633
560,654
263
93,714
14.3
Sept. 2005
532,526
422,467
225
109,833
20.6
June 2005
458,597
356,389
190
102,017
22.2
Mar. 2005
393,086
289,269
201
103,646
26.4
Dec. 2004
363,890
254,518
253
109,116
30.0
Sept. 2004
388,864
274,196
213
114,454
29.4
June 2004
412,861
302,803
214
109,843
26.6
Mar. 2004
397,006
285,787
280
110,939
27.9
Dec. 2003
385,054
270,519
226
114,308
29.7
Sept. 2003
404,543
287,187
235
117,119
29.0
June 2003
430,926
312,221
251
118,452
27.5
Mar. 2003
404,154
285,883
242
118,029
29.2
Dec. 2002
385,629
270,527
224
114,874
29.8
Sept. 2002
391,873
275,594
245
116,033
29.6
June 2002
390,991
280,891
254
109,843
28.1
Mar. 2002
369,237
259,447
261
109,527
29.7
Source: Administrative Office of the U.S. Courts.
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Figure 1. Nonbusiness Chapter 7 and 13 Bankruptcy Filings, 2002-2007

Source: Administrative Office of the U.S. Courts.
In December 2005, the number of filings increased slightly, and the rising trend continued
through June 2007. Given that the latest figures remain far below pre-2005 levels, it seems likely
that the aftereffects of the rush to file triggered by the new law are still being felt. This suggests
that filings will continue to rise throughout 2007. It remains to be seen whether filings will level
off before they reach the levels that prevailed a few years ago under the old bankruptcy law.
‘Š™?Ž›ȱŝȱŽ›œžœȱ‘Š™?Ž›ȱŗřȱ
A major aim of the 2005 bankruptcy amendments was to steer debtors with the ability to repay
into Chapter 13, where the bankruptcy court collects part of the debtor’s income for a number of
years and distributes it to creditors. Before 2005, about 30% of all nonbusiness cases were
Chapter 13, and virtually all the rest were Chapter 7.5 In 2006 and the first three months of 2007,
the Chapter 13 rate has averaged 40.7%.

5 Nonbusiness petitioners can file under Chapter 11, which is standard for corporate reorganizations. However, because
of the complex and costly procedural requirements, only a few individuals use it, as Table 1 shows.
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The data in Table 1 illustrate that the rush to file before the effective date of the new law was in
fact a rush into Chapter 7. Even though the total number of filings in 2005 set a record, the
number of Chapter 13 cases declined from 2004. Clearly the message that debtors received about
the new law was that Chapter 7 relief would become more difficult to obtain, and that Chapter 13
was a considerably less desirable alternative.
Historically, the percentage of cases filed under Chapter 13 has varied significantly and
persistently from state to state. In 2002, 29% of cases nationwide were Chapter 13, but there were
five states where Chapter 13 accounted for more than 50% of all petitions. On the other hand, 10
states had rates of less than 10%.6 Tables 2 and 3 break out the 10 states with the highest and
lowest Chapter 13 rates in 2002, and present data on what happened there in 2005 and 2006.
Table 3 shows that the percentage decline in Chapter 13 filings reported in 2005 was greatest in
the states that had the highest rates in 2002. In 2006, the percentage of Chapter 13 cases has risen
above the historical norm in both high and low rate states, but the increase from 2002 to 2006 is
not more pronounced in either group of states. One might have expected the primary impact of
the new law to be felt in states where Chapter 13 had been relatively rare under the old law, but
the data do not show this. Instead, there appears to be an across-the-board increase in the
percentage of cases filed under Chapter 13. As in the case of total bankruptcy filings, some of this
increase is likely due to the transition experience (when the accelerated filings—and subsequent
drop-off—were predominantly Chapter 7 cases), and it is uncertain how far (or whether) the
Chapter 13 rate will remain permanently above the pre-reform level.

6 The “high Chapter 13” states were mostly in the south, while the “low” states were geographically dispersed, small-
population states. The differences are usually explained as a result of varying court norms, or “legal culture.”
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Śȱ

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Table 2. Number and Percentage of Nonbusiness Bankruptcies Filed Under Chapter 13, 2002-2006
2002 2005 2006
State
Total
Chap. 13
Chap. 13 as
% of Total
Total
Chap. 13
Chap. 13 as
% of Total
Total
Chap. 13
Chap. 13 as
% of Total
GA
74,354 42,844
57.6 79,273 34,449
43.5
39,142 24,355
62.2
SC
15,575 8,837
56.7 15,352 7,913
51.5
6,047 4,414
73.0
TN
62,473 32,707
52.4 65,360 27,868
42.6
31,406 20,638
65.7
AL
41,478 21,690
52.3 47,513 19,234
40.5
19,420 12,863
66.2
NC 35,806
18,693 52.2
42,402
16,015 37.8
16,838
9,273 55.1
TX
77,056 35,996
46.7 117,612 36,842
31.3
34,550 20,395
59.0
AR 23,264
9,709 41.7
30,142
10,177 33.8
9,288
5,028 54.1
LA 26,461
10,267 38.8
36,024
11,006 30.6
10,750
6,614 61.5
DE 3,140
1,186 37.8
4,150
1,208 29.1
1,284
618 48.1
NJ 40,310
14,712 36.5
48,832
11,834 24.2
13,548
5,677 41.9
Total
U.S. 1,536,979 443,952
28.9 2,039,214 407,322
20.0
597,965 248,430
41.5
NH
3,822 361
9.4 5,511 471
8.5
1,707 471
27.6
NM
8,581 767
8.9
11,592 616
5.3
2,426 293
12.1
ME
4,321 366
8.5 6,470 386
6.0
1,238 251
20.3
RI
4,842 393
8.1 5,703 298
5.2
1,573 326
20.7
AK
1,359 110
8.1 2,214 149
6.7
577 90
15.6
WY
2,217 137
6.2 3,183 144
4.5
650 106
16.3
WV
10,109 531
5.3
17,475 619
3.5
2,919 365
12.5
IA
11,454 576
5.0
18,254 895
4.9
4,683 547
11.7
SD
2,540 125
4.9 3,975 293
7.4
900 145
16.1
ND 1,958
79 4.0
3,444
168 4.9
711
93 13.1
Source: Administrative Office of the U.S. Courts.
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Table 3. Change in the Percentage of Nonbusiness Bankruptcies Filed Under
Chapter 13, for Selected States: 2002-2006
Chapter 13 as a % of Total
Percentage Point
Change From
State
2002
2005
2006
2002 to 2005
2002 to 2006
GA
57.6 43.5 62.2
-14.2
4.6
SC
56.7 51.5 73.0
-5.2
16.3
TN
52.4 42.6 65.7
-9.7
13.3
AL
52.3 40.5 66.2
-11.8
13.9
NC
52.2 37.8 55.1
-14.4
2.9
TX
46.7 31.3 59.0
-15.4
12.3
AR
41.7 33.8 54.1
-8.0
12.4
LA
38.8 30.6 61.5
-8.2
22.7
DE
37.8 29.1 48.1
-8.7
10.3
NJ
36.5 24.2 41.9
-12.3
5..4
Total
U.S. 28.9 20.0 41.5
-8.9 12.6
NH 9.4
8.5
27.6 -0.9 18.2
NM 8.9
5.3
12.1 -3.6 3.2
ME 8.5
6.0
20.3 -2.5 11.8
RI 8.1
5.2
20.7 -2.9 12.6
AK 8.1
6.7
15.6 -1.4 7.5
WY 6.2
4.5
16.3 -1.7 10.1
WV 5.3
3.5
12.5 -1.7 7.2
IA 5.0
4.9
11.7 -0.1 6.7
SD 4.9
7.4
16.1 2.4 11.2
ND 4.0
4.9
13.1 0.8 9.1
Source: Administrative Office of the U.S. Courts.

ž?‘˜›ȱ˜—?ŠŒ?ȱ —?˜›–Š?’˜—ȱ

Brian W. Cashell
Heather Durkin Negley
Specialist in Macroeconomic Policy

bcashell@crs.loc.gov, 7-7816

Mark Jickling

Specialist in Financial Economics
mjickling@crs.loc.gov, 7-7784

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