Report: Revised bankruptcy law in ’05 spurred ‘rush’ to file under Chapter 7

Spurred by the impact of new bankruptcy law provisions that limited discharge of debts, a “rush” to file occurred in 2005 as 80% of all personal bankruptcy filings that year were made under Chapter 7 of the law, a new report from the federal consumer financial protection agency states.

The report, issued by the Consumer Financial Protection Bureau (CFPB) Wednesday, describes how the volume and types of bankruptcy filings have changed throughout the period 2001 – 2018, which includes implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 and the Great Recession of 2007-2010.

The bureau said its report (released as its latest quarterly consumer credit trends review) focuses on consumers who filed for Chapter 7 or Chapter 13 bankruptcy between 2001 and 2018. Under a Chapter 7 bankruptcy, the bureau noted, a debtor’s non-exempt assets are liquidated in order to repay creditors and the remaining debt is generally discharged. Under a Chapter 13 bankruptcy, debtors enter into a repayment plan to repay a portion of their debt.

However, the 2005 BAPCPA (which took effect in October) established a means test for filers with income above a certain level that limited their ability to file under Chapter 7.

“This created a rush to file before BAPCPA took effect and increased the share of Chapter 7 filings to 80% of all personal bankruptcy filings in 2005,” the bureau wrote. From 2001 – 2004, the bureau wrote, about 75% of personal bankruptcy filers used Chapter 7.

“In 2015-18, with the effects of the Great Recession fading, Chapter 7 filings appear to have stabilized at about 63% of personal bankruptcy filings,” the bureau wrote.

Other highlights of the report, the bureau said, included:

  • Bankruptcy petitions generally result in a discharge or dismissal, which occurs when the debtor does not meet the requirements set by the court. “Nearly all Chapter 7 filings result in a discharge of debt, which takes about four months. Less than half of Chapter 13 filers complete their repayment plans and receive a discharge,” the bureau said.
  • Median credit scores of Chapter 7 and 13 filers one year prior to filing increased after BAPCPA but declined starting in 2010 possibly because filers experienced a negative financial shock during the Great Recession which lowered credit scores.
  • On average, Chapter 7 and 13 filers had more than twice the mortgage debt during the Great Recession as in the periods before and after. This is consistent with the financial shock of the recession causing more homeowners to file for bankruptcy.
  • Median credit scores increase steadily from year-to-year after consumers file a bankruptcy petition. Median scores for Chapter 7 filers recover more quickly than those for Chapter 13 filers possibly due to the much quicker and more likely discharge of Chapter 7 filings. Both Chapter 7 and 13 filers who filed in 2001 – 2004 received a second shock in the form of the Great Recession which slowed the recovery in median credit scores.

New report explores trends in consumer bankruptcy

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