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How Has the 2005 Law Affected Bankruptcies?

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According to Congressional hearings, the goal of the 2005 changes in the federal bankruptcy law was to reduce the number of fraudulent filings and to make it more difficult for individuals to file for Chapter 7 bankruptcy. The concern that was fueled in part by the credit card lobby was that people were using bankruptcies as a financial planning tool instead of a last resort to resolve a difficult financial situation. Credit card companies were increasingly getting stuck with maxed out cards from customers who then filed for bankruptcy and were protected from paying what they owed.

A number of changes were introduced into the new law to create a more uniform approach to bankruptcy that still would help honest debtors seeking a fresh start, but would at least make things more difficult for debtors who simply chose not to take charge of their finances.

1.Repeat filings discouraged. Under the new law, someone filing for Chapter 7 bankruptcy could not file again for at least 8 years. A Chapter 13 filer had to wait 4 years to file for Chapter 7 and at least 2 years to file again for a Chapter 13 plan.
2.More financial information needed. Before the 2005 law, debtors could fairly easily disclosure their true income as they filed again and again for bankruptcy. The new law required income proof for the past six months and at least two years of federal tax returns.
3.Income restrictions put in place for Chapter 7. Instead of allowing debtors to choose their bankruptcy chapter, new rules for bankruptcies required debtors to qualify for the popular Chapter 7 filing or be relegated to Chapter 13 status. Debtors whose income was below the median in their state were allowed to file under Chapter 7. High-income debtors would have to complete a complicated means test to show they had very little disposable income available to be allowed to file under Chapter 7.
4.Counseling was required. Both credit counseling before bankruptcy and a financial management course before the end of the bankruptcy cases were added in the new law as requirements for an individual bankruptcy discharge.
Initially, the number of bankruptcy filings plummeted. In 2006, fewer than 900,000 cases were filed, down from the inflated 2005 figure of nearly 2 million cases. However, over the years since the 2005 law, the numbers have steadily increased. More than midway through 2009, the filings were on a pace for 1.4 million bankruptcies, roughly the same amount as the year before the law was changed.

The law had the same effect on Chapter 7 bankruptcies, which were favored in about 70 percent of the cases in 2005. While that figure dropped just under 60 percent for a time, the 2009 numbers show that about 70 percent of individual filers are again choosing Chapter 7 bankruptcy.

While some experts have maintained the numbers of bankruptcies indicate the law has not fulfilled its goals and more changes in the bankruptcy arena are in order, others have maintained that the economic decline that surfaced in 2008 has had a more significant impact on bankruptcies than the 2005 changes in the law.

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