The Bankruptcy Abuse Prevention and Consumer Protection Act will turn 10 years old on Saturday. The process that led to its passage serves as a model of bipartisanship and perseverance.
The law was signed into law by President George W. Bush after eight years of consideration by Congress, and became effective on Oct. 17, 2005. During those eight years, both chambers repeatedly passed this legislation with strong, veto-proof majorities, surpassing 300 votes in the House and 80 votes in the Senate. In fact, half of the Democratic caucus in the House and Senate voted to support this reform.
The House and Senate Judiciary Committees held almost 30 hearings combined on this legislation, with more than 130 witnesses, including a historic Joint House-Senate hearing to explore all of the aspects of this bill.
The question that they faced – how to stop a growing wave of consumer bankruptcies that at one point topped 1.6 million during a period of strong economic growth, while preserving access to bankruptcy for those who truly need it — fortunately had pretty simple answers: force debtors who can afford to repay their debts to do so and stop the abuse of the bankruptcy system. The old system allowed debtors to max out their credit cards and rack up tens or hundreds of thousands of dollars of debt, then declare bankruptcy. Other consumers shouldered the cost of their profligate spending.
The bankruptcy reform law has proven an exceptional success:
- Since the law's enactment, bankruptcy filings have run counter-cyclical to the economy, as one would expect: when the economy goes down, bankruptcy filings go up, but when it improves, filings drop. Prior to the reform's passage, bankruptcy filings rose whether the economy was in a recession or booming, in large part because it was so easy to file and because the bankruptcy code enabled wealthy filers to ”game” the system and retain significant assets.
- The reform has also returned bankruptcy to its roots as a last resort for consumers, particularly wealthy consumers, as it was intended. In fact, one study specifically found that the law has forced higher income individuals “to try to work out their difficulties” outside of bankruptcy, preserving bankruptcy for those consumers who need it and removing it as a financial planning tool of convenience.
- The fact that there has been no real effort to repeal the changes that the reform made also helps to demonstrate just how successful this legislation has been. For example, in the ten years since passage, no bills have been introduced to roll back the reform, even when Democrats obtained supermajorities in the House and Senate.
The legacy of bankruptcy reform, and its continued resilience, helps to demonstrate that there are times when Congress can come together in a bipartisan way to permanently fix a problem, even one as complex as bankruptcy. It also shows that consumers react to incentives. Make it easy to wipe away debt, and that will lead to more default and bankruptcy. Raise the cost of doing so and only those who truly need it will take that path.
Bankruptcy was designed to protect those who were down on their luck and needed a fresh start, but to also ensure that the rules did not enable abuse by the wealthy. The 2005 reform law restored that harmony, and has performed admirably in two extreme test environments: it has demonstrated its sagacity during boom times and during the Great Recession. The right balance has been struck.
Joseph Rubin is a lawyer at Arnall, Golden Gregory. He served as a principal House negotiator of bankruptcy reform in conference committee negotiations between the House and Senate.