Preliminary Observations on the Impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8)

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The Bankruptcy Abuse Prevention and Consumer Protection Act, signed into law on April 20,
2005 (P.L. 109-8), was intended to prevent the filing of abusive bankruptcy petitions and to
require debtors with regular incomes to repay as much of what they owed as possible. Overall, the
perceived effect of these amendments was to make the bankruptcy code significantly more
favorable to creditors. As a result, there was a “rush to the courthouse” between the date of
enactment and the effective date, October 17, 2005. During that period, record numbers of
consumer bankruptcy petitions were filed.
During 2006, by contrast, the number of filings dropped sharply, to less than a quarter of the 2005
figure. No doubt much of the decline is explained by what happened during the transition—many
consumer bankruptcies filed in 2005 were accelerated by the enactment of the new law and would
otherwise have been filed in 2006 or later. At the same time, part of the slowdown may be
permanent, if the new law is having its intended effect of discouraging certain types of filings.
With only six quarters of data under the new law, the lasting impact is uncertain. This report
examines the evidence to date, and offers some preliminary observations on the numbers and
types of bankruptcy petitions filed. It will be updated as new statistics become available.

Total Number of Filings..................................................................................................................1
Chapter 7 Versus Chapter 13...........................................................................................................3
Figure 1. Nonbusiness Chapter 7 and 13 Bankruptcy Filings, 2002-2007......................................3
Table 1. Nonbusiness Bankruptcy Filings by Chapter, 2002-2007.................................................2
Table 2. Number and Percentage of Nonbusiness Bankruptcies Filed Under Chapter 13,
2002-2006..................................................................................................................................... 5
Table 3. Change in the Percentage of Nonbusiness Bankruptcies Filed Under Chapter 13,
for Selected States: 2002-2006.....................................................................................................6
Author Contact Information............................................................................................................6

espite the fact that two of the longest economic expansions in U.S. history occurred
during the 1980s and 1990s, the number of consumer bankruptcy filings rose sharply
during those decades (and continued to rise after 2000). This paradox attracted two kinds D

of explanations. Some analysts detect a growing “financial fragility” among American families—
factors such as medical costs, stagnant median wages, low rates of saving, or increased
dependence on two incomes are said to make households more vulnerable to financial shocks.
Others argued that the bankruptcy code itself was driving up the number of filings. In this view,
the existing law made it too easy for consumers to have their debts discharged (or erased) by the
courts, and thus created an incentive for imprudent or even fraudulent borrowing. Behind the
2005 bankruptcy reform legislation lay “a growing perception that bankruptcy relief may be too
readily available and is sometimes used as a first resort, rather than a last resort,” and that the law
was full of “loopholes and incentives that allow and—sometimes—even encourage opportunistic ¹
personal filings and abuse.”
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was meant to “respond
to many of the factors contributing to the increase in consumer bankruptcy filings, such as lack of
personal financial accountability, the proliferation of serial filings, and the absence of effective
oversight to eliminate abuse in the system. The heart of the bill’s consumer bankruptcy reforms
consists of the implementation of an income/expense screening mechanism (‘needs-based
bankruptcy relief’ or ‘means testing’), which is intended to ensure that debtors repay creditors the ²
maximum they can afford.”
The means test weighs debtors’ income against their debts and living expenses according to an ³
arithmetical formula contained in the statute. In general, debtors whose income—net of specified
expenses and allowances—exceeds certain thresholds are not allowed to file Chapter 7
bankruptcies (where debts are discharged and consumers are free to make a fresh start) but must
either file Chapter 13 petitions (under which they agree to repay part of their debts over a period ⁴
of several years under a court-approved plan) or receive no bankruptcy relief at all.
Thus, the new law, if it works as its sponsors intended, should have two effects. Consumers with
steady incomes and the ability to repay, who filed Chapter 7 petitions under the old law, should be
steered into Chapter 13. Second, the total number of bankruptcies should decline as
“opportunistic” filings are deterred. The tables below present the data that bear on these
questions.

Table 1 below shows quarterly nonbusiness bankruptcy filings since the beginning of 2002.
Through the first quarter of 2005, these figures show no clear trend but fluctuate at a very high
level by historical standards. In the second quarter, the rush to file under the old law becomes
apparent: the 458,597 filings reported were an all-time quarterly high. The record did not last

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long: the number jumped to 532,526 in the third quarter and then to 654,633 in the fourth quarter,
when the new law took effect (on October 17). Dramatic as these increases are, the quarterly data
actually conceal how abrupt the transition was. The Administrative Office of the U.S. Courts,
against its usual practice, published monthly data for 2004 and 2005. In October 2005, 619,588
nonbusiness cases were filed. In November, the figure fell to 13,643.
Table 1. Nonbusiness Bankruptcy Filings by Chapter, 2002-2007
^{Nonbusiness Filings}
^Quarter^{Chap. 13 as}
^Ending^Total^{Chap. 7}^{Chap. 11}^{Chap. 13}^{% of T}^otal
^{June 20}⁰⁷^203,⁷⁴⁴^127,¹⁸⁰¹⁴⁴^76,4²⁰^37.5
^{Mar. 20}⁰⁷^187,³⁶¹^113,⁶⁵⁹¹²³^73,5⁷⁹^39.3
^{Dec. 200}⁶^172,⁰¹³^98,8²⁴¹³⁴^73,0⁵²^42.5
^{Sept. 200}⁶^165,⁸⁶²^96,4⁴²¹⁴⁰^69,2⁸⁰^42.0
^{June 20}⁰⁶^150,⁹⁷⁵^91,6⁷⁴¹³¹^59,1⁷⁰^39.2
^{Mar. 20}⁰⁶^112,⁶⁸⁵^63,2⁵⁰¹²¹^49,3¹⁴^43.8
^{Dec. 200}⁵^654,⁶³³^560,⁶⁵⁴²⁶³^93,7¹⁴^14.3
^{Sept. 200}⁵^532,⁵²⁶^422,⁴⁶⁷²²⁵^109,⁸³³^20.6
^{June 20}⁰⁵^458,⁵⁹⁷^356,³⁸⁹¹⁹⁰^102,⁰¹⁷^22.2
^{Mar. 20}⁰⁵^393,⁰⁸⁶^289,²⁶⁹²⁰¹^103,⁶⁴⁶^26.4
^{Dec. 200}⁴^363,⁸⁹⁰^254,⁵¹⁸²⁵³^109,¹¹⁶^30.0
^{Sept. 200}⁴^388,⁸⁶⁴^274,¹⁹⁶²¹³^114,⁴⁵⁴^29.4
^{June 20}⁰⁴^412,⁸⁶¹^302,⁸⁰³²¹⁴^109,⁸⁴³^26.6
^{Mar. 20}⁰⁴^397,⁰⁰⁶^285,⁷⁸⁷²⁸⁰^110,⁹³⁹^27.9
^{Dec. 200}³^385,⁰⁵⁴^270,⁵¹⁹²²⁶^114,³⁰⁸^29.7
^{Sept. 200}³^404,⁵⁴³^287,¹⁸⁷²³⁵^117,¹¹⁹^29.0
^{June 20}⁰³^430,⁹²⁶^312,²²¹²⁵¹^118,⁴⁵²^27.5
^{Mar. 20}⁰³^404,¹⁵⁴^285,⁸⁸³²⁴²^118,⁰²⁹^29.2
^{Dec. 200}²^385,⁶²⁹^270,⁵²⁷²²⁴^114,⁸⁷⁴^29.8
^{Sept. 200}²^391,⁸⁷³^275,⁵⁹⁴²⁴⁵^116,⁰³³^29.6
^{June 20}⁰²^390,⁹⁹¹^280,⁸⁹¹²⁵⁴^109,⁸⁴³^28.1
^{Mar. 20}⁰²^369,²³⁷^259,⁴⁴⁷²⁶¹^109,⁵²⁷^29.7
^Source:^A^{dministrative Office of}^{the U.S. Courts.}

Figure 1. Nonbusiness Chapter 7 and 13 Bankruptcy Filings, 2002-2007
^Source:^{Administrative Office of}^{the U.S. Courts.}
In December 2005, the number of filings increased slightly, and the rising trend continued
through June 2007. Given that the latest figures remain far below pre-2005 levels, it seems likely
that the aftereffects of the rush to file triggered by the new law are still being felt. This suggests
that filings will continue to rise throughout 2007. It remains to be seen whether filings will level
off before they reach the levels that prevailed a few years ago under the old bankruptcy law.

A major aim of the 2005 bankruptcy amendments was to steer debtors with the ability to repay
into Chapter 13, where the bankruptcy court collects part of the debtor’s income for a number of
years and distributes it to creditors. Before 2005, about 30% of all nonbusiness cases were ⁵
Chapter 13, and virtually all the rest were Chapter 7. In 2006 and the first three months of 2007,
the Chapter 13 rate has averaged 40.7%.

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The data in Table 1 illustrate that the rush to file before the effective date of the new law was in
fact a rush into Chapter 7. Even though the total number of filings in 2005 set a record, the
number of Chapter 13 cases declined from 2004. Clearly the message that debtors received about
the new law was that Chapter 7 relief would become more difficult to obtain, and that Chapter 13
was a considerably less desirable alternative.
Historically, the percentage of cases filed under Chapter 13 has varied significantly and
persistently from state to state. In 2002, 29% of cases nationwide were Chapter 13, but there were
five states where Chapter 13 accounted for more than 50% of all petitions. On the other hand, 10 ⁶
states had rates of less than 10%. Tables 2 and 3 break out the 10 states with the highest and
lowest Chapter 13 rates in 2002, and present data on what happened there in 2005 and 2006.
Table 3 shows that the percentage decline in Chapter 13 filings reported in 2005 was greatest in
the states that had the highest rates in 2002. In 2006, the percentage of Chapter 13 cases has risen
above the historical norm in both high and low rate states, but the increase from 2002 to 2006 is
not more pronounced in either group of states. One might have expected the primary impact of
the new law to be felt in states where Chapter 13 had been relatively rare under the old law, but
the data do not show this. Instead, there appears to be an across-the-board increase in the
percentage of cases filed under Chapter 13. As in the case of total bankruptcy filings, some of this
increase is likely due to the transition experience (when the accelerated filings—and subsequent
drop-off—were predominantly Chapter 7 cases), and it is uncertain how far (or whether) the
Chapter 13 rate will remain permanently above the pre-reform level.

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Table 2. Number and Percentage of Nonbusiness Bankruptcies Filed Under Chapter 13, 2002-2006
²⁰⁰^{2 200}⁵²⁰⁰⁶
^State^{Chap. 13 as}^{Chap. 13 as}^{Chap. 13 as}
^Total^{Chap. 13}^{% of T}^otal^Total^{Chap. 13}^{% of T}^otal^Total^{Chap. 13}^{% of T}^otal
^GA^74,3^{54 42,8}⁴⁴^57.6^79,2^{73 34,4}⁴⁹^43.5^39,1^{42 24,3}⁵⁵^62.2
^SC^15,5^{75 8,83}⁷^56.7^15,3^{52 7,91}³^51.5^6,04^{7 4,41}⁴^73.0
^TN^62,4^{73 32,7}⁰⁷^52.4^65,3^{60 27,8}⁶⁸^42.6^31,4^{06 20,6}³⁸^65.7
^AL^41,4^{78 21,6}⁹⁰^52.3^47,5^{13 19,2}³⁴^40.5^19,4^{20 12,8}⁶³^66.2
^NC^35,8⁰⁶^18,6^{93 52.2}^42,4⁰²^16,0^{15 37.8}^16,8³⁸^9,27^{3 55.1}
^TX^77,0^{56 35,9}⁹⁶^46.7^117,⁶¹^{2 36,8}⁴²^31.3^34,5^{50 20,3}⁹⁵^59.0
^AR^23,2⁶⁴^9,70^{9 41.7}^30,1⁴²^10,1^{77 33.8}^9,28⁸^5,02^{8 54.1}
^LA^26,4⁶¹^10,2^{67 38.8}^36,0²⁴^11,0^{06 30.6}^10,7⁵⁰^6,61^{4 61.5}
ⁱ^{ki/CRS-RS22511}^DE^3,14⁰^1,18^{6 37.8}^4,15⁰^1,20^{8 29.1}^1,28⁴^{618 48.1}
^g/w
^s^.or^NJ^40,3¹⁰^14,7^{12 36.5}^48,8³²^11,8^{34 24.2}^13,5⁴⁸^5,67^{7 41.9}
^le^ak^Total^U.S.^1,53^6,^{979 443,}⁹⁵²^28.9^2,03^9,^{214 407,}³²²^20.0^597,⁹⁶^{5 248,}⁴³⁰^41.5
^://wiki^NH^3,82^{2 361}^9.4^5,51^{1 471}^8.5^1,70^{7 471}^27.6
^h^ttp^NM^8,58^{1 767}^8.9^11,5^{92 616}^5.3^2,42^{6 293}^12.1
^ME^4,32^{1 366}^8.5^6,47^{0 386}^6.0^1,23^{8 251}^20.3
^RI^4,84^{2 393}^8.1^5,70^{3 298}^5.2^1,57^{3 326}^20.7
^AK^1,35^{9 110}^8.1^2,21^{4 149}^6.7⁵⁷⁷⁹⁰^15.6
^WY^2,21^{7 137}^6.2^3,18^{3 144}^4.5^{650 106}^16.3
^WV^10,1^{09 531}^5.3^17,4^{75 619}^3.5^2,91^{9 365}^12.5
^IA^11,4^{54 576}^5.0^18,2^{54 895}^4.9^4,68^{3 547}^11.7
^SD^2,54^{0 125}^4.9^3,97^{5 293}^7.4^{900 145}^16.1
^ND^1,95⁸^{79 4.0}^3,44⁴^{168 4.9}⁷¹¹⁹³^13.1
^Source:^{Administrative Office of}^{the U.S. Courts.}

Table 3. Change in the Percentage of Nonbusiness Bankruptcies Filed Under
Chapter 13, for Selected States: 2002-2006
^{Chapter 13 as a % o}^f^Total^{Percentage Point}^{Change Fr}^om
^State
²⁰⁰²²⁰⁰⁵²⁰⁰⁶²⁰⁰^{2 to 200}⁵²⁰⁰^{2 to 200}⁶
^GA^{57.6 43.5 62.2}^-14.2^4.6
^SC^{56.7 51.5 73.0}^-5.2^16.3
^TN^{52.4 42.6 65.7}^-9.7^13.3
^AL^{52.3 40.5 66.2}^-11.8^13.9
^NC^{52.2 37.8 55.1}^-14.4^2.9
^TX^{46.7 31.3 59.0}^-15.4^12.3
^AR^{41.7 33.8 54.1}^-8.0^12.4
^LA^{38.8 30.6 61.5}^-8.2^22.7
^DE^{37.8 29.1 48.1}^-8.7^10.3
^NJ^{36.5 24.2 41.9}^-12.3^5..4
^Total^U.S.^{28.9 20.0 41.5}^{-8.9 12.6}
^{NH 9.4}^8.5^27.6^-0.9^18.2
^{NM 8.9}^5.3^12.1^-3.6^3.2
^{ME 8.5}^6.0^20.3^-2.5^11.8
^{RI 8.1}^5.2^20.7^-2.9^12.6
^{AK 8.1}^6.7^15.6^-1.4^7.5
^{WY 6.2}^4.5^16.3^-1.7^10.1
^{WV 5.3}^3.5^12.5^-1.7^7.2
^{IA 5.0}^4.9^11.7^-0.1^6.7
^{SD 4.9}^7.4^16.1^2.4^11.2
^{ND 4.0}^4.9^13.1^0.8^9.1
^Source:^{Administrative Office of}^{the U.S. Courts.}

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