Last September, the Consumer Financial Protection Bureau released the latest quarterly consumer credit trends report. This document, whose primary purpose is to track how the frequency and types of bankruptcy filings have varied since 2001, also examines issues like:
- BAPCA effect on the frequency of Chapter 7 filings
- Discharge rates for Chapter 7 bankruptcies vs. Chapter 13
- The impact of the bankruptcy system on credit
- Effect on credit scores
BAPCA effect on Chapter 7 filings
The report found that between 2001 and 2004, three-quarters of consumers who filed for bankruptcy opted for Chapter 7, which allowed them to discharge all unsecured debt over a period of months instead of years.
When the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) took effect in 2005, it implemented the means test, which reviews a filer’s household income to determine whether they have enough disposable income to pay down their debts in a Chapter 13 filing. This new restriction resulted in a surge of Chapter 7 filings before the Act became law.
When the financial difficulties caused by the Great Recession began to fade, the number of Chapter 7 filings appears to have stabilized. Between 2015 and 2018, they accounted for around 69% of all consumer bankruptcies.
Frequency of discharge
Practically all Chapter 7 filings resulted in a discharge after the bankruptcy period was up. In contrast, over half of all Chapter 13 filers were unable to maintain their three to five-year repayment plan, resulting in their cases being dismissed.
This is one of the reasons why bankruptcy courts review Chapter 13 proposals extremely carefully. They want to determine whether or not the repayment plan will be sustainable over the three to five years that it will be in effect.
Effect on credit scores
After BAPCA took effect, the median credit scores of consumers who filed for bankruptcy increased for approximately five years. Then, in 2010, they started to decline, likely because the Great Recession had a damaging effect on credit scores everywhere. The report noted that during the recession, bankruptcy filers had twice as much mortgage debt than they had in the years before and after.
On the whole, Chapter 7 filers rebuilt their credit more quickly than those who filed for Chapter 13, likely because of the shorter duration and higher likelihood of receiving a discharge.
Bankruptcy in New York today
Although bankruptcy levels are not as frequent as they were during the great recession, last August the New York Post reported an upward trend. According to the American Bankruptcy Institute, filings in New York State have been steadily rising over the past three years, rising from 30,112 in 2016 to 34,711 in 2018. Some people have resorted to getting their groceries from food pantries.
If unemployment, illness, or another financial downturn leaves you unable to pay your bills, contact a New York bankruptcy attorney who can help you identify the best way to overcome debt challenges and start over.
Jayson Lutzky is a lawyer who has helped many highly satisfied clients obtain the financial relief they needed through personal bankruptcy. Mr. Lutzky offers free in-officer initial consultations. Call 718-514-6619 to set up an appointment.