Oct. 6 — A major overhaul of the bankruptcy system in 2005 may be driving away consumers who are the most in need of the system's protection, at least according to some experts at an American Bankruptcy Institute webinar held Oct. 6.
While two of the panelists argued that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) has created more obstacles for honest consumer debtors, one countered that the legislation has at least met its stated goal of reducing the skyrocketing number of consumer bankruptcies.
Although BAPCPA was ostensibly created to combat supposed abuse of the bankruptcy system, one of the panelists, attorney Caralyce M. Lassner of Acclaim Legal Services PLLC, Warren, Mich., said in practice it has been like using a backhoe to fix a crack in your sidewalk.
BAPCPA was passed in 2005 to deter abuse of the bankruptcy system by wealthy debtors who could in fact afford to pay their debts, according to panelist Joseph S. Rubin of Arnall Golden Gregory LLP, Washington, who served as counsel to the House Judiciary Committee during development of BAPCPA. Rubin said that stopping these fraudulent bankruptcy filings was the primary focus of the legislation.
But Professor Lois R. Lupica of the University of Maine School of Law said that empirical studies have found no evidence of such widespread abuse among consumer debtors. While Rubin argued that reductions in consumer filings prove that BAPCPA is working, Lupica said those reductions are being driven by other factors.
Lupica said that under BAPCPA the cost of access to the bankruptcy system has increased significantly, which is keeping the poorest debtors from being able to file. She cited an April 2015 study from the Federal Reserve Bank of New York, which found that median attorneys' fees for Chapter 7 filers, which have to be paid up-front, have increased 38 percent.
BAPCPA increased the cost of filling for bankruptcy in a variety of ways, the study states. In particular, the rise in paperwork and the introduction of personal liability for attorneys in case of inaccuracies led to a sizable increase in attorney fees.
Lupica said that while filings may have dropped, there has been a rise in the number of insolvent individuals and a rise in foreclosures. She said filings among these people have dropped precipitously, even though they're the people who need the bankruptcy system the most.
Rubin conceded that BAPCPA may have had some unfortunate side effects and created technical problems, but he believes it has accomplished its goal from a macro perspective. Rubin noted that the bankruptcy establishment largely opposed the bill outright before it was adopted, rather than suggesting modifications that could have avoided the problems consumers are now facing.
The onus has shifted from creditors to debtors, according to Lassner, who represents consumer debtors in bankruptcy. Lassner agreed with Lupica that fraudulent filings were never a major problem in consumer bankruptcy and she took issue with Rubin's assertion that BAPCPA has successfully warded off such filings.
Lassner said that one of her biggest challenges as a practitioner is that it is very difficult to propose a confirmable Chapter 13 plan without major concessions from the debtor or one of the creditors. In Chapter 13, consumer debtors receiving regular income can obtain debt relief while retaining their property by proposing a plan that uses future income to repay debts over a three to five year period.
Lassner said debtors are forced to squeeze every last dime in order to get a plan confirmed. But when unforeseen problems arise during the run of the plan, which Lassner said happens often, debtors can often no longer make their plan payments, which can lead to a dismissal of their case and a denial of discharge. Lassner said it's easier to confirm a Chapter 13 plan for higher-income debtors, while low and middle-income debtors get pushed out.
Although BAPCPA was intended to protect the interests of unsecured creditors, Lupica said distributions to unsecured creditors have actually gone down in both Chapter 7 and Chapter 13. Rubin said this wasn't necessarily surprising because if high-income debtors who don't actually need bankruptcy are being deterred from filing, then distributions from the remaining, less-affluent debtors would naturally be lower.
Lassner countered that unsecured creditors are financing her rising fees, which is actually why they're getting less. She added that in 15 years, she's only encountered one debtor who was trying to manipulate the system out of thousands of cases and that 99 percent of her clients are honest, hard-working individuals who did everything they could to avoid bankruptcy.
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