Bankruptcy Abuse Prevention and Consumer Protection Act

Criticisms[edit]

The 2005 bankruptcy bill was opposed by a wide variety of groups, including consumer advocates, legal scholars, retired bankruptcy judges, and the editorial pages of many national and regional newspapers. While criticisms of the bill were wide ranging, the central objections of its opponents focused on the bill's sponsors' contention that bankruptcy fraud was widespread, the strict means test that would force more debtors to file under Chapter 13 (under which a percentage of debts must be paid over a period of 3–5 years) as opposed to Chapter 7 (under which debts are paid only out of existing assets), the additional penalties and responsibilities the bill placed on debtors, and the bill's many provisions favorable to credit card companies. Opponents of the bill regularly pointed out that the credit card industry spent more than $100 million lobbying for the bill over the course of eight years.^[25] There has also been significant criticism of BAPCPA's changes to Chapter 11 business bankruptcies.^[26] Harvey Miller, one of the most-prominent bankruptcy attorneys in the country (particularly in terms of representing corporate debtors) has described BAPCPA as "ill-conceived."^[23]


One of the primary stated purposes of the bankruptcy bill was to cut down on abusive or fraudulent uses of the bankruptcy system. As Congressman F. James Sensenbrenner Jr. (R-Wis), one of the bill's key supporters in the House, argued, "This bill will help restore responsibility and integrity to the bankruptcy system by cracking down on fraudulent, abusive, and opportunistic bankruptcy claims."^[27] Opponents of the bill argued that claims of bankruptcy abuse and fraud were wildly overblown, and that the vast majority of bankruptcies were related to medical expenses and job losses. These arguments were bolstered by an in-depth study and survey of 1,771 bankruptcy cases by scholars at Harvard University, of whom 931 submitted to interviews. The study found that "about half" of bankruptcy filers in the year 2001 cited out-of-pocket medical bills in excess of $10,000 as a major contributor to bankruptcy (the average bankruptcy filer in this study was a 41-year-old woman with a median income of $25,000, slightly below the personal income average for that year).^[28]


Perhaps the most controversial provisions of the bill was the strict means test it established to determine whether a debtor's filing under Chapter 7 of the bankruptcy code would be considered as an "abuse" and therefore subject to dismissal. This decision was previously made by a bankruptcy court judge, who would evaluate the particular circumstances that led to a bankruptcy. Critics of the means test, which is triggered if a debtor makes more than their state's median income, argued that it ignored the many causes of individual bankruptcies, including job loss, family illnesses, and predatory lending, and would force debtors seeking to challenge the test into costly litigation, driving them even further into debt.^[29]


Besides the stricter means test, opponents of the bill also objected to the many other obstacles the bill creates for individuals seeking bankruptcy protection. These changes included more detailed reporting requirements, higher fees, mandated credit counseling, and the additional liability placed on bankruptcy attorneys, which critics argued would drive up attorneys' fees and decrease the number of lawyers willing to help consumers file.^[2] These criticisms were partly borne out in the months following the new law, as lawyers have reported that the bankruptcy process has become significantly more arduous, forcing them to charge higher fees and take fewer clients.^[30]


One criticism of the law was that the law made the discharge of liability for medical bills more difficult.^[31]


A major target of the bill's opponents were provisions they described as beneficial to credit card companies. In particular, critics objected to the extension to eight years from six to the time before which debtors could liquidate their debts through bankruptcy, and requirements that those who file for multiple bankruptcies pay previous credit card debt that would have been forgiven under the old law.^[25] The bill's opponents were especially critical of provisions that expanded exemptions to the discharge of credit card debt, forcing spouses owed alimony to compete more often with credit card companies and other lenders for their unpaid child support. More broadly the bill's critics argued that the legislation did nothing to curtail what they characterize as predatory practices of credit card companies, such as exorbitant interest rates, rising and often hidden fees, and targeting minors and the recently bankrupt for new cards. The bill's critics argue that these practices are themselves significant contributors to the growth of consumer bankruptcies.^[32]