Doctrinal Issues In Consumer Bankruptcy Essay

2383 words - 10 pages

In the United States, two interrelated factors generated renewed debate about consumer bankruptcy. First, there was a staggering and accelerating rise in consumer bankruptcy filings in recent decades. Second, largely in response, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8.Congress established the modern consumer bankruptcy system in the United States with the enactment of the 1978 Bankruptcy Code, which substantially liberalized the consumer bankruptcy system. Article I, § 8, of the U.S. Constitution grants to Congress the exclusive authority to enact "uniform laws on the subject of bankruptcies throughout the United ...view middle of the document...

Throughout the 1980s and into the 1990s, consumer-filing rates continued to rise. Finally, in the mid-1990s, the rates exploded in the face of unprecedented economic prosperity, low interest rates, low unemployment rates, and rapid gains in household wealth as the result of roaring stock and housing markets. During the 1980s, consumer bankruptcy filings doubled from about three hundred thousand annual filings to just over six hundred thousand, then doubled again to about 1.2 million filings by 2000. In 2004, the final full year before BAPCPA, consumers filed 1.5 million bankruptcy cases.At the same time, the 1994 congressional elections ushered in a political sea change in Washington, realigning the ideological balance away from the traditional pro-debtor ideology and toward an ideology of personal responsibility, culminating in the enactment of BAPCPA. This statute substantially tightened loopholes in the bankruptcy system. It provided new tools and safeguards against bankruptcy fraud (such as asset concealment) and the strategic use of bankruptcy for such purposes as evading domestic support obligations. It also required filers with above-median income levels who could repay a substantial portion of their debts to do so through a court-approved chapter 13 repayment plan, rather than being eligible for chapter 7.Traditional Model to Explain Bankruptcy UseThis confluence of rising consumer bankruptcy filings in the face of great economic prosperity also shook the intellectual foundations of the consumer bankruptcy system. Traditionally, scholars thought that consumer bankruptcy filings were caused by household financial distress and that changes in the filing rate over time could be explained by changes in macroeconomic variables. For instance, consumer bankruptcy filing rates rose during the Great Depression, only to fall off dramatically in the subsequent period. The debtor-friendly 1978 Code reflected this dominant intellectual understanding of the causes of bankruptcy. Notwithstanding the obvious anomaly of rising bankruptcy filing rates in the face of record levels of prosperity, many leading bankruptcy scholars continue to adhere to the traditional distress model as an operative model of consumer bankruptcy filings.The traditional model argues that consumer bankruptcy filings primarily occur due to underlying household economic distress occasioned by involuntary economic shocks. According to the traditional model, there are thus one or two basic forces. First, rising bankruptcy rates are a direct function of consumer indebtedness. Scholars argue that consumers have become more indebted over time and are less able to pay their debts and have become more vulnerable to sudden and unexpected income or expenditure shocks. Second, either independently or in connection with overindebtedness, consumer bankruptcies are triggered by unanticipated exogenous shocks to income or liabilities, such as unemployment, divorce, or health problems, which...

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