Bankruptcy in America: Where are we seven years after reform?
While economic worries, including high unemployment and high rates of foreclosure, persist in America, one indicator that receives relatively little media attention is household bankruptcy. While bankruptcy, particularly Chapter 7 bankruptcy, offers a fresh financial start to the petitioner, certain types of obligations, such as child support, tax liens, and security interests in automobiles and homes, remain the responsibility of the petitioner (i.e., the person seeking bankruptcy protection). For the debt that is discharged, all efforts by creditors to recover or collect from the bankrupt party (outside the bankruptcy process) must cease. There is no ready source of data on the amount of debt discharged annually in bankruptcy proceedings.
As reported in past Profitwise News and Views articles (April 2006 and June 2009 editions), the bankruptcy statute underwent a significant and long-awaited amendment in October 2005 (Bankruptcy Abuse Prevention and Consumer Protection Act, aka the Bankruptcy Reform Act of 2005). While there were numerous, noteworthy changes to the statute, one of the most controversial changes was to the manner in which the petitioner qualified for either Chapter 7 or Chapter 13 relief. In Chapter 13, petitioners are required to enter into a three- to five-year repayment plan Bankruptcy in America: Where are we seven years after reform? by Helen Mirza for most of their debt. Obviously, most petitioners hope to be able to qualify for Chapter 7 and thus rid themselves permanently of almost all of their (unsecured) debt. In addition, depending on the state in which the petitioner resides, the petitioner is entitled to keep a certain amount of property; these exempt items include the home, vehicle, tools of the petitioner’s trade, clothing and other personal items. While bankruptcy is exclusively a federal remedy carried out in the federal court system, the state of residence determines exemptions for property the petitioner can keep. The reforms of 2005 included limits on the practice commonly known as “forum shopping,” where petitioners tried to pick their state of residence when filing bankruptcy, tending (collectively) toward those with the most exemptions. Certain states, including Texas and Florida, had notoriously generous home exemptions. The ability to “forum shop” for exemptions was greatly restricted by the 2005 reforms.