Is Bankruptcy Reform Legislation Working? in 2005 When Legislators Launched Bankruptcy Reform Measures, Annual Personal Bankruptcy Filings Were Averaging Well over 1 Million per Year

By Easterwood, Lisa | Partners in Community and Economic Development, Fall 2007 | Go to article overview

Is Bankruptcy Reform Legislation Working? in 2005 When Legislators Launched Bankruptcy Reform Measures, Annual Personal Bankruptcy Filings Were Averaging Well over 1 Million per Year


Easterwood, Lisa, Partners in Community and Economic Development


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The number doubled to just over 2 million in 2005 due to the surge of filings in anticipation of the October enactment date. (See Partners Vol. 15, No. 2.)

Not surprisingly, the barrage of filings in 2005 was followed by a dramatic decrease in 2006. Consumer bankruptcies dropped by 71 percent, to a total of 598,000 filings for the year.

Does this mean the legislation has succeeded in putting a damper on bankruptcy filings? Not necessarily. Most analysts believe that passage of the legislation prompted many consumers who were working through credit problems to opt instead for filing--before tougher measures were put in place. According to the American

Bankruptcy Institute (ABI), 500,000 consumers raced to file claims the week before the bankruptcy law took effect. (1) This rush to file in 2005 very likely contributed to the subsequent steep drop in 2006 filings.

The question remains whether the new legislation will keep bankruptcy filings low. Figures for 2007 already indicate a significant rise in filings. Growth in the numbers of bankruptcy filings can be traced to an increase in mortgage delinquencies and foreclosures nationwide. Some analysts predict that bankruptcy filings could reach pre-reform levels of one million by year-end.

Credit counseling needs improvement

The effectiveness of credit counseling, a critical component of the bankruptcy reform legislation, is under scrutiny in response to opinions stated in a recent Government Accountability Office (GAO) report. It indicates that the pre-filing credit counseling required by the law does not seem to be working as intended. (2)

According to the GAO, "Anecdotal evidence suggests that by the time most consumers receive counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy." The GAO recommended that the Justice Department track and analyze the results of credit counseling to gauge its impact on bankruptcy filings.

Justice Department tracking results show that at least 10 percent of the consumers who completed counseling decided not to file bankruptcy. However, the data do not rule out the possibility that filings may have occurred at a later date. The Justice Department plans to improve current tracking procedures with enhanced automation and time series data that will provide more reliable information on the outcome of credit counseling.

Georgia leads as nation's "bankruptcy capital"

Most states logged a significant decrease in personal bankruptcy filings in 2006. Georgia saw a drop as well but continued to lead the nation with the highest number of individual filings. On a per capita basis (based on filings per 1,000 households), however, Georgia ended the year second behind Tennessee.

Part of the reason for Georgia's dubious distinction may be the state's creditor-friendly laws, which have often left borrowers with few options other than bankruptcy to protect them in the event of financial difficulties, especially when a mortgage is involved. Georgia is a non-judicial state that permits lenders to foreclose on a home without going to court. From initiating foreclosure proceedings to selling a home on the courthouse steps, the process can be completed in as few as 37 days in Georgia, compared with a timeframe of close to a year in states like Florida and New York where foreclosure happens under judicial law. …

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