NCPA - National Center for Policy Analysis


October 25, 2006

In the aftermath of the Bankruptcy Abuse Prevention and Consumer Protection Act -- a law designed to prevent people from having their debts erased regardless of their ability to repay them -- evidence suggests that opponents' fears were misplaced, not to say cynical, says the Wall Street Journal.  

Before the bill was signed last year, bankruptcy claims were running rampant, says the Journal:

  • Between 1995 and 2004, personal bankruptcies rose 78 percent.
  • More and more people were running up credit card and other debt and then seeking Chapter 7 relief, which essentially allowed them to walk away from their obligations.

Under the new law:

  • Individuals are required to file for Chapter 13 bankruptcy and submit to a means-tested, court-ordered repayment plan.
  • The law makes exceptions for the poor and elderly, as well as extraordinary cases involving debt that results from medical expenses, military service or divorce.

Overall, the law has helped bring the number of bankruptcies under control:

  • The number of bankruptcy filings is down some two-thirds from what it's been in recent years.
  • In the past, about 20 percent of bankruptcy filers have had incomes above the national median. But since the law took effect, nearly all filers are below the median.

That's good news for businesses and consumers alike, says the Journal.  Abuse of the bankruptcy laws drives up the cost of credit for everyone and reduces credit availability at the margin.  When people are allowed to exploit the bankruptcy code and burn their lenders, others are left to pick up the tab.

Source: Editorial, "Bankrupt Opposition," Wall Street Journal, October 25, 2006.

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