Nine Years of Lobbying Yields a Five Year Break

In 2005, soon after George W. Bush’s reelection, a bankruptcy bill that had been pushed by the banking and credit card industries for nine years finally passed and became law. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) introduced additional restrictions and requirements for individuals hoping to file for personal bankruptcy and was advertised as a protection against irresponsible borrowers that would safeguard the availability of credit for the rest of us. The new rules did have a substantial effect, momentarily cutting bankruptcies in half, but as time passed and the economy worsened, bankruptcies gradually edged upwards toward their previous levels.

Now comes the word there were 770,117 personal bankruptcy cases during the first half of this year and the American Bankruptcy Institute predicts a total of 1.6 million bankruptcies for all of 2010. In 2005, the year the new law was introduced, there were a record 2 million bankruptcies, but that was an artificial peak caused by a run to declare bankruptcy before the new rules went into effect in October of 2005. Prior to his highly atypical year, bankruptcies hovered around 1.6 million in 2003 and 2004. So now, a mere five years after the law was introduced, bankruptcies are back to their pre-BAPCPA levels.

What does this episode tell us? That the remarkably high bankruptcy rate in the United States is not a function of the easy process of declaring. The 2005 law made filing much more onerous. Rather, as Samuel Gerdano, excutive director of the ABI put it: "Years of rising consumer debt and low savings rates, combined with the housing and unemployment crisis, are causing bankruptcy levels not seen since the 2005."

Until these underlying problems are solved, tinkering with the bankruptcy laws will have little effect.