Bankruptcy Abuse Prevention and Consumer Protection Act of 2005: How the Credit Card Industry's Perseverance Paid Off
Scott, Robert H.,, III, Journal of Economic Issues
Enacted on October 17, 2005, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) marked the most significant change in United States' bankruptcy legislation since 1978. An important aspect of BAPCPA is that it makes fewer people eligible to file Chapter 7 bankruptcy. Until BAPCPA, Chapter 7 was the most popular form of personal bankruptcy because it eliminated non-secured debt--mostly, credit card debt. BAPCPA was passed at a time when the United States was experiencing significant annual increases in personal bankruptcy filings. While some researchers (e.g. Posner 1975; Michelle White 1991) have claimed that bankruptcy is a fault of moral character, there is another suspect: namely, the credit card companies that profit from increasing consumer indebtedness, but were losing $4 billion a year due to bankruptcy filings before BAPCPA (Waller 2001, 874). This paper presents research showing how the credit card industry developed, how credit card companies helped implement BAPCPA, and the new law's effects on the economy and individuals.
William Waller's article "Kick'em While They're Down: Anti-Consumer Bankruptcy Reform" (2001) is the best presentation to date of the institutionalist view of personal bankruptcy. But Waller's paper was published before BAPCPA was enacted. There are important implications associated with BAPCPA that Waller did not (could not) foretell. This analysis builds upon the work of Waller and other institutional economists (Adkisson and McFerrin 2005; Dolfsma and McMaster 2007; Redmond 2001; Veblen  1994; Watkins 2000) by presenting an institutionalist interpretation and analysis of BAPCPA. Specifically, this paper isolates the credit card industry as the main driving force behind BAPCPA.
This paper draws on research conducted in the year since BAPCPA's enactment that study its many effects. On October 16, 2006 the independent nonprofit bankruptcy research organization, American Bankruptcy Institute (ABI), organized a program entitled "A Year After BAPCPA" at Georgetown University Law School. (1) The program included practitioners, lawyers, judges, academics, and policy specialists from all sides of the BAPCPA debate. The program's transcript (247 pages) provides detailed insight into BAPCPA's influence on consumers, lawyers, and the economy in the first year of its existence.
The following sections present: (1) the nuances of bankruptcy types; (2) the highlights of BAPCPA; (3) some different perspectives on personal bankruptcy; (4) empirical findings that identify characteristics of bankruptcy fliers; (5) policy prescriptions to help reduce the overall number of personal bankruptcies and minimize negative effects of BAPCPA; and (6) concluding remarks.
Nuances of Bankruptcy Types
The Bankruptcy Act of 1898 is the foundation of today's modern bankruptcy laws. Before this act, bankruptcy laws were not permanent; they were enacted only during times of economic crisis. It was the Chandler Act of 1938 (a New Deal reform) that first made bankruptcy legislation more debtor-friendly (Adkisson and McFerrin 2005, 450). One important change made was to include the option to file Chapter 13 bankruptcy, which allowed people with considerable assets to file bankruptcy and pay off a portion of their debt over a number of years. Until this time, Chapter 7 bankruptcy was the only personal bankruptcy option available (Nader 2005; Skeel 2001).
The two most common types of personal bankruptcy are Chapter 7 and Chapter 13. (2) Chapter 7 bankruptcy allows a debtor to dissolve eligible debt obligations. Before BAPCPA's enactment, Chapter 7 bankruptcy filings accounted for an average of 70 percent of all personal bankruptcies. Just after BAPCPA, the number of Chapter 7 filings fell below 30 percent (www.abiworld.org). (3) It is a common misperception that Chapter 7 bankruptcy discharges all personal debt. In fact, Chapter 7 bankruptcy only eliminates unsecured high interest debt, financial company loans, and some medical debts. …