It is now more than six months since the Bankruptcy Abuse and Consumer Protection Act of 2005 generally was enacted, and some answers to the short-term effects of the bill are beginning to take form. These short-term effects are exhibiting a dramatic influence on the rate and chapter type of bankruptcy filings, yet understanding the long-term impacts of the new law will continue through time.
Since the bankruptcy-law reforms generally took effect on Oct. 17, the volume of bankruptcy filings has reflected as much as a 75% decline over 2005 volumes. The last two weeks of October saw filing rates drop to only 500 per day, less than 10% of the previous volumes for the same period noted in the years prior.
Since October, daily filing rates have been increasing, averaging 650 in November, 1,000 in December, 1,200 in January and 1,700 in February. In March 2005, an average of 2,000 consumer bankruptcies were filed each day.
Analyzing last year's spike in bankruptcy filings, we saw that nearly 800,000 unexpected filings (mostly Chapter 7) occurred just before Oct. 17. With low filing rates through the end of the year, approximately 600,000 unexpected filings occurred in 2005 overall. These low filing rates since October seem highly influenced by the absence of those "early filers" in the bankruptcy system. Given the current growth rate and the large volume of the early filers, this population of consumers continues to influence filing rates in 2006.
In addition to the low filing rates, the chapter distribution remains one of the most influenced statistics. More than 99.9% of consumers choose to file either under Chapter 7 or Chapter 13. In Chapter 13, a consumer sets up on a repayment plan for their unsecured debts, while most unsecured debts are eliminated through a Chapter 7 filing.
Before the new law, Chapter 13 filers typically represented 30% of consumer bankruptcy filings. However, nearly 60% of filings last November were filed as Chapter 13. While the increase in Chapter 13 filings may reflect a positive impact on unsecured creditors, resulting in the potential repayment of debt, the increase appears short-lived. The percentage of Chapter 13 filings is steadily decreasing, falling to less then 40% in March. Those early Chapter 7 filers who are now not in the court system also influenced this short-term change in chapter distribution.
While the influence of the new law is beginning to reflect some of the short-term factors, the long-term impacts will take time to understand and resolve. Many questions still remain: Will filing rates decrease because consumers are being sent to mandatory nonprofit budget and credit counseling before they file? Will consumers seek alternatives to bankruptcy? Will mandatory counseling or changes in the limitations on refilings have long-term impacts on reducing repeat filings? Will the means test result in more long-term Chapter 13 filings, or will the inability to cram down secured debt on an automobile remove consumer incentives to file Chapter 13? Answers to these questions and others will continue to reflect the impact of the new law.
All of the stakeholders in the process and bankruptcy professionals continue to implement the new law and may have the greatest influence on its success or failure. Moving forward, consumer-filing trends continue to be monitored while providing insight to all stakeholders as financial institutions gain perspective on how to educate customers on practical money management.
Chris Lundquist is founder of Lundquist Consulting Inc. and has served the bankruptcy industry for some 16 years. He offers expertise in research and analytics, consulting and customized data-processing services with a strong emphasis in bankruptcy systems and statistics. He can be reached at clundquist
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Authoritative analysis and perspective for every segment of the payments industry
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