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Article Excerpt
Enacted on October 17, 2005, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) marked the most significant change in United States' bankruptcy legislation since 1978. An important aspect of BAPCPA is that it makes fewer people eligible to file Chapter 7 bankruptcy. Until BAPCPA, Chapter 7 was the most popular form of personal bankruptcy because it eliminated non-secured debt--mostly, credit card debt. BAPCPA was passed at a time when the United States was experiencing significant annual increases in personal bankruptcy filings. While some researchers (e.g. Posner 1975; Michelle White 1991) have claimed that bankruptcy is a fault of moral character, there is another suspect: namely, the credit card companies that profit from increasing consumer indebtedness, but were losing $4 billion a year due to bankruptcy filings before BAPCPA (Waller 2001, 874). This paper presents research showing how the credit card industry developed, how credit card companies helped implement BAPCPA, and the new law's effects on the economy and individuals.
William Waller's article "Kick'em While They're Down: Anti-Consumer Bankruptcy Reform" (2001) is the best presentation to date of the institutionalist view of personal bankruptcy. But Waller's paper was published before BAPCPA was enacted. There are important implications associated with BAPCPA that Waller did not (could not) foretell. This analysis builds upon the work of Waller and other institutional economists (Adkisson and McFerrin 2005; Dolfsma and McMaster 2007; Redmond 2001; Veblen [1899] 1994; Watkins 2000) by presenting an institutionalist interpretation and analysis of BAPCPA. Specifically, this paper isolates the credit card industry as the main driving force behind BAPCPA.
This paper draws on research conducted in the year since BAPCPA's enactment that study its many effects. On October 16, 2006 the independent nonprofit bankruptcy research organization, American Bankruptcy Institute (ABI), organized a program entitled "A Year After BAPCPA" at Georgetown University Law School. (1) The program included practitioners, lawyers, judges, academics, and policy specialists from all sides of the BAPCPA debate. The program's transcript (247 pages) provides detailed insight into BAPCPA's influence on consumers, lawyers, and the economy in the first year of its existence.
The following sections present: (1) the nuances of bankruptcy types; (2) the highlights of BAPCPA; (3) some different perspectives on personal bankruptcy; (4) empirical findings that identify characteristics of bankruptcy fliers; (5) policy prescriptions to help reduce the overall number of personal bankruptcies and minimize negative effects of BAPCPA; and (6) concluding remarks.
Nuances of Bankruptcy Types
The Bankruptcy Act of 1898 is the foundation of today's modern bankruptcy laws. Before this act, bankruptcy laws were not permanent; they were enacted only during times of economic crisis. It was the Chandler Act of 1938 (a New Deal reform) that first made bankruptcy legislation more debtor-friendly (Adkisson and McFerrin 2005, 450). One important change made was to include the option to file Chapter 13 bankruptcy, which allowed people with considerable assets to file bankruptcy and pay off a portion of their debt over a number of years. Until this time, Chapter 7 bankruptcy was the only personal bankruptcy option available (Nader 2005; Skeel 2001).
The two most common types of personal bankruptcy are Chapter 7 and Chapter 13. (2) Chapter 7 bankruptcy allows a debtor to dissolve eligible debt obligations. Before BAPCPA's enactment, Chapter 7 bankruptcy filings accounted for an average of 70 percent of all personal bankruptcies. Just after BAPCPA, the number of Chapter 7 filings fell below 30 percent (www.abiworld.org). (3) It is a common misperception that Chapter 7 bankruptcy discharges all personal debt. In fact, Chapter 7 bankruptcy only eliminates unsecured high interest debt, financial company loans, and some medical debts. It does not expunge mortgage loans (or any associated penalty fees, taxes, etc.), education loans, outstanding tax debts, child support, or alimony. So instituting a policy that reduces the number of Chapter 7 filings helps one industry most: the consumer credit lending industry (read: credit card companies) (Michelle White 2006; Manning 2000, 344; Nader 2005).
If a bankruptcy filer has significant assets, a judge will typically have him or her file Chapter 13 bankruptcy. Chapter 13 bankruptcy requires debtors to repay their debts over a three to five year period as specified by the court. Roughly two-thirds of people who file Chapter 13 bankruptcy never make it entirely through their debt repayment plan outlined by the court. These people typically exit the bankruptcy system, never getting their debts discharged (Michaela White 2006, 171; Manning 2000, 345; Sullivan 2006, 31). They must then establish new debt repayment schedules with their creditors, which gives debtors more flexibility with when payments are made and how much is paid each time. Court ordered repayment plans fail for many reasons: job loss, unexpected expenses, or the plan organized by the court was unrealistic. And, if someone who files under Chapter 13 misses even one payment at anytime for any reason--in the debt repayment schedule outlined by the court--their case is automatically dismissed. This is one reason politicians in the 1970s argued that "forced participation in a [Chapter 13 plan] has so little prospect for success that it should not be adopted as a feature of the bankruptcy system" (Skeel 2001, 154).
BAPCPA Highlighted
On March 11, 2005 the Senate passed BAPCPA (Senate Bill 256), a bill that drastically reformed United States' bankruptcy laws. Then on April 14, 2005, the House passed BAPCPA by a vote of 302 to 126. It was officially enacted on October 17, 2005--six months after President Bush signed it.
Between 1999 and 2005, credit card companies contributed almost $25 million to politicians and political parties in an effort to reform personal bankruptcy legislation. MBNA (one of the country's largest issuers of credit cards) spent more than $17 million lobbying Congress from January 1999 to June 2004 for reform. BAPCPA has existed in a number of different forms since the late 1990s when credit card companies started pursuing legislative reform. Congress came close to passing an Act in 2001, but were thwarted by the 9/11 terrorist attacks. (4) Up to this point the top twenty-five credit card companies had spent at least $3.6 million on political contributions directly related to their support of personal bankruptcy reform, but they were not discouraged (Waller 2001, 874). They ramped up spending after 2001 and were eventually rewarded (www.opensecrets.com).
Credit card companies are estimated to recoup four billion dollars a year due to BAPCPA. This translates into a 7.5 percent increase in revenue each year. Credit card companies gain from BAPCPA because it allows them more time to collect fees and interest rates from debtors. It also gives them more opportunity to garnish the wages of debtors (House Report 2005; Leach 2005).
Charles Tabb's (2006b) research shows a strong correlation between bankruptcy filings and credit card debt (his conclusions are further supported by the empirical analysis conducted below). His research also shows that while consumer debt in general is correlated with personal bankruptcy, it is actually people's rising credit card debt that is significantly correlated with the increased number of bankruptcies. According to Michelle White (2006), credit card lenders have noticeably increased their offerings to risky borrowers and will continue to do so now that BAPCPA exists. She states:
Late charges, over-limit charges, and penalty interest rates have been going up and up.... The credit card pricing pattern makes consumption more risky, which makes bankruptcy more valuable.... But, the adoption of BAPCPA has made it...
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