Did Bankruptcy Reform Fail? An Empirical Study of Consumer Debtors

Before 2005, many people went broke and many filed for bankruptcy. After 2005, many people still go broke, but not so many file for bankruptcy. Why has the number of bankruptcies declined? Surely it is not the economy. All throughout the 2000s, families have been under increasing economic pressure. Median family incomes have declined, basic expenses have risen, and families are shouldering unprecedented debt loads. Defaults remain high for credit cards and car loans, while mortgage foreclosures have soared. By 2008, over half of all Americans reported that their incomes were falling behind their cost of living. These data all point in the same direction: people are still going broke in large numbers. Yet despite this evidence of growing financial distress, the number of families seeking bankruptcy protection dropped abruptly after adoption of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"). Some of this shift can be explained by a sharp increase in the number of people filing shortly before the amendments went into effect - a sudden rush to the courthouse of "transition filings" that might have drained the pool of troubled families that otherwise would have filed over a longer time horizon. But the number of bankruptcy filings continued to remain low, even after the transition. If bankruptcy filings had continued at the same level as they had been immediately before enactment of BAPCPA, about 1.6 million petitions would have been filed in 2007 - about twice as many as the 827,000 bankruptcies that actually occurred. The sharp reduction in filings after the amendments represents about 800,000 families that would have filed but did not. In the face of deteriorating economic circumstances, the absence of these families from the bankruptcy system is strong evidence that BAPCPA has had a powerful effect on families in financial trouble.