What Congress Didn’t Learn from BAPCPA

As every consumer bankruptcy attorney knows, in 2005 Congress bowed down to ten years of pressure from the financial services industry and passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).  Whether purchased or persuaded, lawmakers listened to the industry that was already in the process of creating one of the greatest financial crises in U.S. history and built a high wall of additional costs and obstacles for consumers seeking bankruptcy protection.

Like many bankruptcy attorneys, Max recognized the true motivations of the lobbyists who made passing BAPCPA their focus for a decade, and it was the passage of the Act that inspired his now-familiar statement, “If it’s war they want, it’s war they shall have.”  That same year, recognizing the ever-greater struggles facing both consumers and the attorneys who represented them, Max hosted his first Bankruptcy Boot Camp.  So how did BAPCPA work out?

Recently, USA Today ran a story about how the cost to consumers filing for bankruptcy protection had increased since the 2005 “reform”.  The article indicated that the cost to an individual filing bankruptcy had increased by as much as 55% in the six years since BAPCPA took effect.  Part of that cost was attributable to increased attorneys’ fees: as we know all too well, the new and “improved” bankruptcy process requires attorneys to invest a lot more time and effort in the preparation of a consumer bankruptcy case and take on more responsibility.  But that’s only a fraction of the increased cost; bankruptcy reform also increased filing fees and added new expenses such as the pre- and post-bankruptcy educational requirements.

It’s no surprise that BAPCPA made bankruptcy tougher and more expensive for consumers.  After all, in spite of the rhetoric surrounding the change its true purpose was clear from the beginning:  the credit industry wasn’t spending tens of millions of dollars to get this bill passed just to clean up the small amount of fraud that was taking place.  In that regard, the industry got its wish; it got harder and more expensive to file for bankruptcy, and fewer people did so…for a while.

But the increased cost wasn’t just to consumers.  In 2008, the U.S. Government Accountability Office released data indicating that between 2005 and 2007, the Act cost the U.S. Trustee Program approximately $72.4 million. And that’s just administrative costs–it doesn’t take into account the $22 million decline in filing fees received during that same time period.

At all this cost to everyone else involved, the credit industry must have gotten its wish, right?  Initially, it looked like that might be the case. Immediately following the effective date of BAPCPA, bankruptcy filings dropped dramatically.  Of course, that was due at least in part to the fact that filings had spiked even more dramatically in the short period after passage but before the Act took effect.  The credit industry undoubtedly knew it would take a hit during that transitional period; in February of 2005 less than 40% of charge-offs were related to bankruptcy, and in December of the same year (just weeks after BAPCPA took effect) that figure jumped to more than 75%.

After the initial hit, things were looking good for the credit industry in more ways than one.  Not only did bankruptcy filings drop off dramatically, but consumers were easier to scare. Some collection agencies adopted the tactic of telling consumers on the telephone that they’d checked and under the new law, the consumer didn’t qualify for bankruptcy, so they were going to have to pay the debt.   Credit card charge-off rates dropped from 4.59% in the first quarter of 2005 to 3.13% in the first quarter of 2006.

And then they started to climb again.   By the first quarter of 2008, charge-off rates exceeded pre-BAPCPA rates; by late 2010 it had exceeded 10%.  The short-sighted credit industry’s bright idea cost consumers, cost the government and, in the end, didn’t even benefit the bad guys.  An idea that didn’t work, hurt consumers, cost the government and hurt the economy, all because the financial industry wanted to squeeze a little more blood out of stones to shore up its empire?  Sounds a lot like, well, everything else the financial industry has done over the past several years.  This time, the results have been just as catastrophic, but on a much larger scale; the industry has managed to reach beyond those who were already in financial trouble and bring millions of others to the crisis point in its quest to sock away even more cash before the bombs it planted exploded in the rest of our faces.

And still…those lobbyists’ machinations aren’t falling on deaf ears.  Congress, having fallen victim (and made the rest of us victims) to the swindlers and caused significant harm with BAPCPA, then smiled and nodded as those same financial services giants chipped away at the foundations of our economic system as a whole. And now, as it’s crumbling around us in large part because of those decisions, those same forces of destruction still have our legislators’ ears. Why?  And when does it end?