Immediately before the implementation of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), individuals flooded the courts with bankruptcy petitions because they feared filing bankruptcy would become almost impossible after the Act took affect. I work for a bankruptcy attorney and I remember October of 2005 – – we worked seven days per week and filed more bankruptcy cases than I ever dreamed possible. After this surge in filings, bankruptcy filings did drop off drastically. Many bankruptcy attorneys had to cut staff and overhead during 2006 and 2007 because of the decrease in the number of bankruptcy filings. However, due to the economy and the recession bankruptcy filings are now rising at alarming rates. Americans in every income range and level of education are now facing the possibility of bankruptcy.
According to bankruptcy statistics available from the U.S. Courts website, during the 12-month period ending September 30, 2009 there were 1,402,816 bankruptcy filings nationwide which is a 34.5% increase over the same 12-month period one year ago. The majority of the increase in filings is under Chapter 7, which is a surprise to many of those who helped create BAPCPA. One of the purposes of the new Act was to force people to file Chapter 13 to pay some of their debt back rather than file Chapter 7 and discharge all of the debt.
One way the Act was designed to direct people into bankruptcy under Chapter 13 was by the creation of the Statement of Current Monthly Income and Means Test Calculation (the “Means Test”). Each individual filing for bankruptcy relief must complete this form providing their income for the past six months prior to filing. The average income is then compared to the median income level in the county they reside according to statistics set by the government. If they have petitioned for bankruptcy under Chapter 7 and their income level is above the median, then the presumption of abuse arises and the United States Trustee’s office is required to review their case for possible dismissal or conversion to Chapter 13. By creating this Means Test, Congress thought more people would be forced into Chapter 13 bankruptcy thereby reducing the number of Chapter 7 filings. This proved true according to the statistics reported by The Federal Judiciary. During 2004 and 2005, bankruptcy cases filed under Chapter 7 were over one million while those filed under Chapter 13 were between 400 and 450 thousand. Since the implementation of BAPCPA Chapter 7, cases decreased dramatically and have not risen to the level they were prior to the Act.
However, as shown by the current statistics for 2008 and 2009 there are far more Chapter 7 filings than any other chapter and filings are rising at an increasing rate. The reason for this unexpected increase in the filing of Chapter 7 cases over Chapter 13 cases is the recession. Because individuals have lost their jobs or had decreases in income, they are falling below the median income level. If they are not below the median income level on the first analysis under the Means Test, when they take into account their living expenses they are often still able to file for Chapter 7 relief. I believe the number of Chapter 7 bankruptcy cases being filed is a strong indicator of how severe the recession has been on Americans. Individuals who normally would not have qualified for a Chapter 7 bankruptcy case under the Means Test are now well below the median level because of loosing a job or severe pay cuts. Furthermore, the number of business cases being filed is increasing which will only raise the level of Chapter 7 consumer cases as individuals continue to lose their jobs as their employers are forced in Chapter 7 bankruptcy. Until we see a huge improvement in the economy, the level of bankruptcies will continue to rise despite the changes Congress tried to make under BAPCPA.