The new bankruptcy laws went into effect October 17th, 2005, since then the number of bankruptcy filings has plummeted.Â For the 3rd quarter of ’06, bankruptcy filings were down an astonishing 68.4% from the same quarter of ’05.Â Many commentators attribute the dramatic reduction in filings to the “new and tougher” bankruptcy laws.Â However, I believe that the new bankruptcy laws themselves have little to do with the downturn in filings and that consumer bankruptcy filings will gradually increase throughout 2007 as the public gains a better understanding of the new laws and the backlog of financially distressed people rebuilds.Â
The vast majority of people who filed under the “old law” would still qualify to file bankruptcy under the “new law.”Â Although the new bankruptcy law includes a “means-test” that sets an income limit for Chapter 7 bankruptcy eligibility, the majority of debtors are below this limit and Chapter 13 bankruptcy is still available to anyone whose income exceeds the allowable amount.Â A basic credit counseling course, debtor education course, and more required documentation are the most significant changes required by the new bankruptcy law.Â Even after the law change, bankruptcy remains a relatively simple option, especially with the help of an experienced bankruptcy attorney.Â Â
I expect bankruptcy fillings to increase in 2007 for two major reasons:
- The Public is Learning the Facts about the Bankruptcy Law ChangeIn an attempt to capitalize on the bankruptcy law change, many bankruptcy law firms heavily advertised the urgency of filing before the impending legislation and painted a dire picture of bankruptcy after the law change.Â Their messages included “File now, before it’s too late,” “Beat the Law Change,” “Last Chance to File Bankruptcy.”Â This advertising blitz had the desired effect of a large spike in bankruptcy filings leading up to the law change, but also inadvertently created a misconception that the new bankruptcy laws were so tough that bankruptcy would not be a viable option after the law change.Â
In reality, bankruptcy still exits and offers much the same relief that was offered prior to the bankruptcy law change.Â As bankruptcy attorneys shift their advertising messages to “You Can Still File Bankruptcy” and “Bankruptcy is Still an Option,” the public is slowly gaining a better understanding that although the law change did make dramatic changes to the bankruptcy law, the intent and power of the bankruptcy process remains largely unchanged.Â It takes time to educate the public, but look for bankruptcy filings in 2007 to increase as the public separates the bankruptcy myths form the bankruptcy truths.
- The Amount of People Who Need to File Bankruptcy is IncreasingÂPeople usually don’t go bankrupt overnight; the accumulation of debt is usually a gradual process over a period of years.Â People usually file for bankruptcy shortly after an event that forced them to take action; this is usually some form of creditor collection activity (phone calls, garnishments, lawsuits, foreclosures, etc.). Many people who could benefit from filing bankruptcy don’t file until a creditor forces them to take action.Â
In my experience as a bankruptcy attorney, I’ve noticed that creditors only have the resources to actively collect on a small percentage of total debts.Â This results in a large buildup of people who are effectively “bankrupt,” but haven’t filed formal bankruptcy proceedings.Â Before the law change of 2005, this buildup steadily maintained itself, but the majority of people who were effectively “bankrupt” filed for bankruptcy independent of any action from their creditors because of the bankruptcy law change.Â Over the course of the 15 months since the law change, the number of people “on-the-fence” has steadily increased and bankruptcy filings are likely to increase in 2007 as creditors force these people into taking action to protect their property and wages.
Most bankruptcy attorneys that I have spoken with agree that the volume is steadily increasing and anticipate the filings to increase in 2007, especially over the 1st quarter, which is usually the busiest time of year for a bankruptcy law firm.Â Â Â