Bankruptcy Abuse: An Empirical Study of Consumer Exemptions Cases

On April 20, 2005, the President of the United States signed a sweeping legislative overhaul of the consumer bankruptcy system. The bankruptcy reform legislation is based on an empirical assertion: that sophisticated debtors with the means to re-pay their debts were instead filing for bankruptcy and acquiring a discharge, thereby abusing the bankruptcy system.\nThis Article presents the results of an empirical study of bankruptcy court doctrine in consumer exemptions proceedings over a twenty-year period. The findings suggest a serious empirical flaw in the premise of the bankruptcy reform legislation. The study shows that the bankruptcy system minimizes abuse by valuing property exemptions to decrease the amount of the discharge for sophisticated debtors and increase the amount of the discharge for unsophisticated debtors. The data show that the presence of sophistication reduces a debtor’s chance of success in an exemptions proceeding by as much as 87.8%. Courts systematically value exemptions to impose costs on the “can-pay” debtor. This pattern of abuse minimization emerged endogenously, without the prompting of hierarchical, exogenous forces such as Congressional or appellate court directives.\nThese findings suggest that Congress has misunderstood the complex nature of the bankruptcy system, misdiagnosed the problem of consumer credit, and applied the wrong remedy. The Article concludes with a preliminary attempt to re-focus analysis of debt regulation around a “no-fault” .