U. S. Bankruptcy Laws Took Very Long to Get Off the Ground

Posted by Kevin on January 30, 2018 under Bankruptcy Blog | Be the First to Comment

The Constitution empowered Congress to “pass uniform laws on the subject of bankruptcies,” which then took more than 100 years to do so.

• The United States started its existence without a national bankruptcy law. The Second Continental Congress established the United States with its founding constitution consisting of the “Articles of Confederation and Perpetual Union,” drafted in 1776-1777.  The Articles of Confederation were not ratified by the original 13 states until 1781.  The Articles did not provide for a nationwide bankruptcy system.
• The American Revolutionary War formally ended in 1783 with the signing of the Treaty of Paris.  The Articles of Confederation proved inadequate, so in 1787, a constitutional convention was called to draft a new constitution.  The U.S. Constitution was ratified by the states in 1789.  It did allow for, yet did not create, a national bankruptcy law. It merely empowered Congress to “pass uniform laws on the subject of bankruptcies”.
• Three different times during the 1800s, a federal bankruptcy law was passed in direct reaction to a financial “panic.” But these federal laws were each repealed after the financial crises were over. The first act was passed in 1800 but repealed in 1803. The second was passed in 1841 but repealed in 1847.  The third bankruptcy act was passed in 1867 but repealed in 1878.
• During the long periods when there was no nationwide law in effect, the states developed a patchwork of bankruptcy and debtor-creditor laws. But these local laws became more and more cumbersome as commerce became ever more interstate.
• Finally, Congress got it right when it passed the Bankruptcy Act of 1898.   The 1898 Act lasted 80 years.  This law was inspired by commercial creditors to help in the collection of debts.  However, it included the following very important debtor-friendly provisions: most debts became dischargeable, and creditors no longer had to be paid a certain minimum percentage of their debts.
• This Bankruptcy Act of 1898 was amended many times, significantly in 1938 in reaction to the Great Depression. Among other things, the 1938 amendment added the “chapter XIII” wage earners’ plans, the predecessor to today’s Chapter 13s.
• The 1978 Bankruptcy Reform Act, the result of a decade of study and debate, gave us the Bankruptcy Code. It has been amended every few years since then, most significantly in 2005 with BAPCPA, the so–called Bankruptcy Abuse Prevention and Consumer Protection Act.

Setting the Record Straight About Whether You Can File a Chapter 7 “Straight Bankruptcy” Case

Posted by on May 28, 2016 under Bankruptcy Blog | Be the First to Comment

From the mid-1990’s to 2005, the creditor lobby worked hard to change the Bankruptcy Code.  In their eyes, too many people, who could afford to pay part of their debts, were filing under Chapter 7 and walking away scot free.  They wanted people to be forced into Chapter 13, where you have to make monthly payments to a Trustee for 36-60 months if the prospective debtor had the means to pay.  Finally, in 2005, Congress changed the law which is called “Bankruptcy Abuse Prevention and Consumer Protection ” Act (BAPCPA).  11 years later, there is still confusion among the public about whether you can still file for Chapter 7, or you must file under Chapter 13.   To qualify for Chapter 7, you have to pass the Means Test, the bankruptcy court version of what the IRS uses to determine what you can pay on back taxes.  The Means Test is not straightforward, and some issues concerning its application are not clear even after a decade of BAPCPA.  However, the bottom line is that you can still file under Chapter  7.

1. Bad Publicity

The creditor lobby, the media and sometimes even the bankruptcy system have all had a hand in making many people think that qualifying for “straight bankruptcy” is hard.  While it is true that for the first couple of years, Chapter 13 filings were up, after debtor attorneys started to understand the new system,  the vast majority of filings  in New Jersey are still under Chapter 7.

2.  A Confusing Statute

Upfront, BAPCPA is loaded with abuse prevention but I don’t see much consumer protection.  The law is poorly written, confusing and sometimes one section contradicts another section.   Moreover, because of these statutory contradictions and ambiguities, Courts, all the way up to the Supreme Court, have been scratching their heads trying to make sense of it.  If the judges are having trouble with the complexities of the new law, then it is no surprise that ordinary people are confused.

3. Most Can “Skip” the “Means Test”

Parts of the “means test”–the major mechanism now for qualifying under Chapter 7—are mind-numbingly confusing, but many people can avoid all that simply by virtue of their income. Without getting into the calculations here, basically if your “income” (as specially defined for this purpose) before filing was no more than the published median income amount for your state and size of family, then you qualify for Chapter 7 without needing to go through any more of the  “means test.”

Also, certain kinds of folks can skip the “means test” no matter the amount of their income, specifically present or recent business owners who have more business debt than consumer debt.

4.  Passing the Means Test turned out to be easier than we thought

Even if you are a consumer debtor whose “income” IS higher than the applicable median income amount, through some good lawyering, which is creative but perfectly legitimate,  you may well be able to lower your “income” or increase the reporting of your expenses to bring your overall under the applicable median amount.  If so, you qualify for Chapter 7.

5. Chapter 13 is Sometimes the Better Option

The purpose of the “means test” is to make people who have the “means” pay back some of their debts through a Chapter 13 case. In the relatively few times that a person does not qualify under Chapter 7 and so has to do a Chapter 13 case, in almost all cases,  the amount that must be paid in the Chapter 13 case to the creditors is much less than the total debt, making it not such a bad deal. Also, often a person who “just wants to file Chapter 7 and get it over with” learns that Chapter 13 comes with surprising advantages, which are more helpful to the debtor in the long run.

If You Filed Bankruptcy Just Before the 2005 “Reform,” You Now Can, or Likely Soon Will Be Able to, File Again

Posted by Kevin on February 12, 2015 under Bankruptcy Blog | Comments are off for this article

After filing bankruptcy, you hope you never have to do that again. But it’s good to know you can if you need to.

 These next two blogs are, first today, an important recent bankruptcy history lesson, and then in the second blog, why this lesson may be quite important to you.

Filing Bankruptcy in Good Economic Times

Eight years ago, in the late winter of 2005, the U.S. economy was relatively robust. The Gross Domestic Product (GDP) had increased in 2004 the most since before 9/11. In fact it would turn out that the GDP increases for 2004 and 2005, at 3.5% and 3.1% respectively, were the best from 2000 through the present.

And yet, more people filed bankruptcy in 2005 than any year in history.

The Bulge in Bankruptcy Filings 8 Years Ago

Here is a table of the total number of bankruptcy filings in the United States for the last 10 years: 

Notice that by far the most bankruptcies were filed in 2005. Not even in the depths of the Great Recession in 2009, 2010, and 2011 were more bankruptcies filed.

The BAPCPA Filing Bulge

The misnamed Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) is the reason for this otherwise oddly timed spike in filings. Other “Bankruptcy Reform” Acts had been kicking around Congress since 1997, and one even passed Congress in 2000 but President Clinton refused to sign that one into law. Then every year after that a similar bill was introduced but never passed, until after the 2004 Congressional elections. President Bush was re-elected to his second term and Republicans had won larger majorities in both Houses of Congress. On February 1, 2005 BAPCPA was introduced in Congress, in March the House of Representatives passed it, in April the Senate passed it, and President Bush signed it into law on April 20, 2005, with an effective date of October 17, 2005.

By the time of the results of the November 2004 election, the odds were high that some major “reform” would become law in the upcoming Congress. That became even clearer a few months later in February when the bill was introduced, so the word started going out that people who were considering filing bankruptcy should seriously consider filing before the new law went into effect. Then when the law did pass, with 6 months until its October, 2005 effective date, lots more people got the word and the rush was on to file before that date.

This filing frenzy is shown by the quarterly bankruptcy numbers during this period, with big quarterly increases from the November 2004 election until the October 2005 new law effective date, and the plummeting of filings right after:

Notice how more bankruptcies were filed in just the 4^th Quarter of 2005 than in the entire year of 2006. (See the earlier table). In fact, according to the Administrative Office of the U.S. Courts, of the 667,431 bankruptcies filed in that 4^th Quarter (October through December), 630,402 were filed in just the month of October. And more than 600,000 of those were filed in just the first 16 days of that October! That means that during those 16 days, the number of bankruptcy cases filed was about the same as during the entire year of 2006!

Why This Recent Bankruptcy History Matters

This history matters if you, or somebody you know, were one of those millions of people who filed bankruptcy in the run-up to BAPCPA, and because of the economic violence of the Great Recession you again need relief.

If you are one of these people, then you need to be aware of two things:

1. The BAPCPA “reform” was both as bad and not as bad as feared. It is probably one of the most badly written pieces of Congressional legislation to have made it into law. It is filled with internal inconsistencies, logical conundrums, and unintended consequences. It has created infinite unnecessary headaches for millions of bankruptcy filers during its 7 and half years, as well as at every level of the federal bankruptcy court system all the way up to the U.S. Supreme Court. But partly because of its dreadfully bad drafting, most of the law’s changes have NOT changed the end result for most people needing bankruptcy relief. Most people filing Chapter 7 “straight bankruptcy” can do so, and most of the tools of Chapter 13 “adjustment of debts” are still available for those who need them.
2.  If you need bankruptcy help again, you very likely either qualify now or will in the next few months. That’s the subject of the next blog.