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?