Bankruptcy Blog

The effect of bankruptcy means testing

admin on May 4th, 2008

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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was brought about due to the presumption that a large proportion of bankruptcy filers were abusing the bankruptcy system. In order to stop this “abuse”, the BAPCPA put into place the new Means Testing requirement. Also put into place was a requirement to review the effects of the new IRS standards used in the means testing.

In case you aren’t familiar, the means testing forms take into account debtor income, family size, and household expense averages based on standards from the IRS and Census Bureau. The original source for the State Median Family Income is the Census Bureau and the original source for the National and Local Standards is the IRS. These standards are supposed to give red flags to bankruptcy trustees that debtors who are filing bankruptcy may be hiding extra income by claiming expenses that are out of line with the average family at their income level. So just how many people are deemed to be hiding this extra income? One would think, after the millions of dollars spent by the lobbying groups that wanted the new bankruptcy law passed, that it would be a fairly high number.

According to a report submitted by the Department of Justice to Congress, the new means testing only effects 8% of chapter 7 bankruptcy filers. What does that mean? Simply put it means that those filers then have to complete the additional means testing questions that compare their actual expenses to the averages developed by the Census to see if they are abusing the system. Of those 8% of filers that have to do this, only 10% of those had enough disposable income to trigger the presumption of abuse. So what is that final number? Less than 1%, to be exact, .08%. That means out of every 1000 people that file chapter 7 bankruptcy, 8 people (or couples) will likely be forced into chapter 13 bankruptcy. So, of the approximately 600,000 chapter 7 bankruptcies filed in 2007, there would be roughly 4800 that have the presumption of abuse arise. Doesn’t seem like the nightmare the credit industry painted for Congress does it?

What HAS the BAPCPA done? Well it’s increased the costs of bankruptcy filing. Attorneys are now charging more as they have more paperwork to complete, more laws to learn, and the added responsibility of having to check to make sure their clients aren’t hiding assets. Each bankruptcy filer also has to take mandatory credit counseling before filing, as well as a personal financial management course after filing, both of which cost money. Frankly, the lower bankruptcy filing numbers may simply be due to the additional cost of filing. That may explain why the numbers are going back up, people simply have to wait longer and save up in order to afford to file.

Of course the courts and bankruptcy trustees haven’t gotten out of more work either. The BAPCPA created 35 new types of motions, objections and hearings.

I wonder if the credit industry would be willing to share the effects the new laws have had on the amount they have lost due to bankruptcy filings?

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The Average Bankruptcy Filer

admin on May 4th, 2008

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (”BAPCPA”) was created under the guise that most bankruptcy filers were taking advantage of our lax bankruptcy laws. Of course it was no surprise that the supporters of the reform were credit card companies that lost revenue from the most filings due to their own lax credit regulations.

According to the Federal Reserve, the typical person filing bankruptcy has earnings of just $24,000 a year, while they have an average of $36,000 in total credit card debt. Just who is taking advantage of whom?

The average bankruptcy filer is 38 years old and is slightly better educated than the average population. Two out of three have lost a job and half of them have suffered a serious health problem prior to filing bankruptcy. Fewer than 9% of those filing bankruptcy have NOT suffered either a job loss, serious medical issue or divorce.

While researching for this post, I stumbled upon the results of a study on Lifestyles of the Rich and Bankrupt which makes a point that should not be missed. In a footnote they say:

“Somehow, the debtors had managed to incur more than $237,000 in debt on 30 credit cards. Both debtors had stable incomes, and there was no evidence of serious medical problems or other catastrophe affecting their family. The husband had been a shoe salesman for 17 years, and the wife had managed a restaurant for 7 years. Their combined take-home pay was a little under $3,200 per month. Schedule B of their petition was probably one of the more detailed Schedule Bs in the history of bankruptcy, listing such items as 250 books, 47 hand tools, 39 towels, 23 posters, 23 knick-knacks, 13 office supplies and a basketball pole. The total value of all the personal items listed on Schedule B was only about $4,000, so it was not clear how they had incurred the remaining $233,000 in credit card charges. Application of the provisions in the proposed legislation revealed that these debtors would be eligible for chapter 7 under means testing.”

Here is a case where most people would say, um, yea, they obviously were taking advantage of their credit and misspending it all while knowing they could not repay it. And that’s what BAPCPA changes were supposed to knock out, right? Yet, when the calculations for the means test were run, they would still be eligible for Chapter 7 bankruptcy. Ironic, isn’t it?

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