Bankruptcy Filings Approaching 2005 Levels

August 14, 2009 – Bankruptcy reform legislation that was signed into law in 2005 was supposed reduce the number of personal bankruptcies declared by Americans. For a time, it worked. But that was before the economy tanked. Last month, more than 126,000 people declared bankruptcy. That is not much different than numbers for July of 2005 when 133,000 people filed for bankruptcy protection. These numbers are significant because 2005 saw the largest number of personal bankruptcy filings of any year in American history. The current trend does not speak well the direction of the economy and it shows just how wrong Congress’s conclusions about bankruptcy were.

 

For many years, lenders had complained about the US bankruptcy law. As it was written before 2005, a debtor could declare Chapter 7 bankruptcy and have virtually all of their debts wiped out. About the only thing that wasn’t covered by the law were student loans.

 

Lenders claimed that a large percentage of bankruptcies that were declared were actually an abuse of the system. And they managed to get Congress to agree even though there was little evidence to support such a claim. In fact, the two primary reasons for bankruptcy in 2005 were unexpected job loss and uncovered medical bills; the same two reasons that drive most people into bankruptcy today. In September of 2005, a new law went into effect which made it much more difficult for anyone to declare bankruptcy and walk away from their debts.

 

Ironically, the new law may very well have contributed to the  nation’s current financial woes. One of the provisions of the new law prevents bankruptcy judges from modifying the terms of a mortgage or reducing the amount owed for a primary residence. This made it much easier for lenders to provide home mortgages to people with some assurance that they would be paid back. Had the old law still been in place, it is quite likely that lenders would have done a better job of screening home buyers and insuring they were capable of repaying their loans. In turn, this could have reduced or eliminated the need for bank bailouts.

 

For the fiscal year ending June 30^th, personal bankruptcy filings were up 34% compared to the previous year. That number continues to rise due to job losses, loss of medical coverage and reductions in home equity values.