Chapter 7 - Solutions for a Financial Crisis » Chapter 7 Bankruptcy

The economic recession in the U.S. has led to the worst financial environment in the last fifty years. And while the impact is felt across the board, there’s one area that seems to defy expectation: personal bankruptcies.

As companies fail and unemployment rises, the rate of personal bankruptcies has only just begun to rise to levels that were last seen before a new bankruptcy law in 2005 changed the culture of personal bankruptcy.

The Philadelphia Business Journal recently tracked these trends in personal bankruptcies in an article that attempts to deal with the peculiar case of modern personal bankruptcy.

Philadelphia area bankruptcy lawyers told the Journal that consumer bankruptcies had not skyrocketed in the last few years, though they have seen the numbers slowly going up. They noted a combination of factors that have kept the tide of filings slower than intuition might suggest.

First is the more stringent bankruptcy law that recently went into place. The 2005 law change made it more difficult and more expensive to file a personal bankruptcy as a consumer.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ratcheted up requirements for bankruptcy protection with the creation of the Chapter 7 means test. Overall, the law made it harder for some consumers to file for Chapter 7 protection.

Above-average income consumers now often must file for Chapter 13 protection, which can have more restrictive allowances. Among these is a five-year repayment plan. Under Chapter 13, filers must also receive credit counseling.

Current figures for personal bankruptcy filings are now starting to approach the levels reached before 2005, and before the Bankruptcy Abuse Prevention and Consumer Protection Act.

Before the 2005 law went into action, there were between 1.1 and 1.6 million consumer bankruptcy filings in the U.S. People rushed to file for bankruptcy before the new law in 2005 and the number rose to 2 million.

In 2006, the number fell by 70 percent to just under 600,000 filings. Only with the mortgage crisis did the figures start to go up again, and it wasn’t until 2009 when bankruptcy filings reached pre-2005 numbers, at 1.4 million.

The cost of personal bankruptcy filings has, in the estimation of Henry Sommer, the dean of the Pennsylvania consumer bankruptcy bar, risen from about $1,000 to about $2,000 after the passing of the bankruptcy law. This difference, he said, was more than many low-income people are likely to pay. In addition, filing is more complex than it used to be.

According to bankruptcy lawyer Paul Winterhalter, bankruptcy lawyers are finally starting to adjust to the new laws, but that some laws requiring counseling are holding up the process.

“It imposes hardships and creates impediments to filing because the counseling holds up the filing. It doesn’t serve a practical use. It’s a charade,” he told the Philadelphia Business Journal.

Another reason for the drop in bankruptcy filings may be that some people don’t qualify for Chapter 7 bankruptcy because they make too much money but are still unable to afford a Chapter 13.

Another factor leading to fewer bankruptcies, in Philadelphia at least, may be the foreclosure prevention program that has enabled some residents to restructure their mortgage agreements.