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Understanding Bankruptcy

The Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005

Since 1978, there have been a variety of changes to U.S. bankruptcy law. However, except for one exception, they need not concern us. The one exception was an important amendment passed by the U.S. Congress in 2005 and signed into law by President George W. Bush.

2005: The Bankruptcy Abuse Prevention and Consumer Protection Act

BAPCPA (as the law is known) was first drafted in 1997. BAPCPA is a complex set of new regulations created at the behest of banks, credit card companies and other major creditors, who mounted an enormous, multi-year lobbying effort to change the U.S. bankruptcy system. Indeed, BAPCPA encountered such heavy resistance that it took eight years for the law to be passed.

BAPCPA created sweeping changes to the U.S. bankruptcy system in ways that affect both individuals and businesses. As you would expect, many of these changes were in the interests of the credit industry. Overall, BAPCPA increased the costs of bankruptcy to individuals, while decreasing the benefits. Specifically, BAPCPA made it more difficult to:

  • File for bankruptcy
  • Discharge debts
  • Discharge all student loans (including private loans)
  • File for bankruptcy more than once
  • Avoid certain liens (claims against processions)
  • Save money by moving to another state before filing for bankruptcy

At the same time, BAPCPA:

  • Increased paperwork requirements
  • Increased filing fees
  • Required bankruptcy trustees to accept responsibly for inaccurate information

BAPCPA also mandated that individuals filing for bankruptcy would be required to take a course in credit counseling and financial management.

As I mentioned, before BAPCPA was passed in 2005, there was a long period of intense debate. Credit industry lobbyists maintained that BAPCPA would benefit both creditors and consumers. The idea was that, once credit card companies and banks had their costs lowered, they would pass on the savings to consumers in the form of lower interest rates and fees. Critics of the law claimed that BAPCPA was nothing more than special interest legislation, designed to favor credit card companies at the expense of ordinary people.

In July of 2008, the American Bankruptcy Law Journal published a research paper called "The Effect of BAPCPA on Credit Card Industry Profits and Prices". The paper was written by Michael Simkovic, a highly regarded law professor. After studying the relevant data, Simkovic found that, as promised, BAPCPA did decrease the number of bankruptcies, as well as losses to credit card companies. As a result, credit card companies achieved record profits. However, these profits were not passed on to consumers. Indeed, the cost of credit card debt actually increased. As such, Simkovic concluded that "the 2005 bankruptcy reforms profited credit card companies at consumers' expense".

Today, thanks to BAPCPA, filing for bankruptcy in the United States is significantly more complex and less debtor-friendly than it used to be. For this reason, if you are considering bankruptcy, it is important to start the process by consulting a professional trustee. Have him or her evaluate your case to see if you qualify for bankruptcy and, if so, which type of bankruptcy is best for you.

To help you understand the various options, we will now turn our attention to the different types of bankruptcy.

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