Too Poor to File Bankruptcy: The (un)Intended Consequences of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
Many of my clients are now too poor to file bankruptcy.
How did this come about? Wasn’t the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the Act) signed into law by President George W. Bush supposed to help the consumer and prevent abuse? The law went into full effect on October 17, 2005, and immediately had a chilling effect on bankruptcy that has only recently begun to ease.
The Act is a product of the banking lobby, and the inclusion of the term consumer protection is a misnomer similar to many of the laws enacted by Congress in recent years where the name is designed to obscure an opposite purpose. The consumer protection aspects of the Act are few. Various sections of the Act label those who assist consumers in filing bankruptcy as debt relief agencies, which, depending on the views of the federal courts in your jurisdiction, may or may not include attorneys. Debt relief agencies must label themselves as such and include an indication that they help people file bankruptcy in their advertising. Those who assist consumers in filing bankruptcy must provide a series of notices and a written fee agreement within a short period after meeting with them for the first time and offering services, regardless of whether the services are accepted by the consumer or not. The only other section of the Act that might reasonably be labeled consumer protection is a requirement for court review of most reaffirmation agreements, which is the method by which a bankrupt debtor will forego their discharge with regard to a particular debt. The effect of these consumer protection provisions is similar to that of the new law as a whole: They increase the costs and deter consumers from filing bankruptcy due primarily to the significantly increased costs and fees that are a result of these and other requirements of the Bankruptcy Act.
The consumer protection aspects of the Act have also had a profound effect on general practitioners who, prior to October 17, 2005, occasionally handled a bankruptcy case. The advertising requirement alone is a significant expense and risks a stigma of being a debt relief agency that might dissuade potential clients who are not seeking bankruptcy services. Further, the requirement to have a fee agreement and provide notices means that a form fee agreement for the specific purpose and the notices must be readily available at, or shortly after, the time of the initial consultation. Though my evidence is anecdotal, these requirements have been the primary cause of numerous solo practitioners and small firms ceasing to do bankruptcy and referring all such work to counsel with a bankruptcy focus.
The credit counseling requirements are the next time-consuming barrier to filing bankruptcy. Credit counseling is now required both before and after a bankruptcy petition is filed, whether under Chapter 7 or under Chapter 13. Credit counseling is generally in the neighborhood of $50 per session, a combined $100 item for both prepetition and postpetition counseling. Although an indigent debtor may be able to obtain credit counseling at a reduced price or even free, the time and effort involved is itself a barrier to filing. (With gas costs, driving for free credit counseling is not exactly free either.) Further, bankruptcy counsel will need a relationship with at least one credit counseling agency.
The most prominent feature of the new law is the means testing required for easy passage through Chapter 7 bankruptcy or for a Chapter 13 plan of less than five years duration. Ironically, while the focus and fear of bankruptcy petitioners anticipating practice under the new Act, the means test has little actual impact on the business of bankruptcy outside major cities. High income areas, such as those major cities, drive up the average income in the region and make it easy for many middle class families in rural areas to pass the means test. However, the ancillary requirements of the means test are a significant barrier. Although only sixty days of pay stubs must be filed in a bankruptcy case, for all practical purposes, six months of pay stubs are required to complete the means test to determine a debtor’s “currently monthly income.” I have at least one client who has needed six months to obtain six months of pay stubs. Record keeping requirements such as this one are a significant barrier for some debtors. More importantly, the significant period that an attorney spends reviewing the client’s income records and completing the current monthly income form adds significantly to the cost of bankruptcy.
The Act also provides for attorney liability where the schedules are prepared erroneously, including the statement of current monthly income. This significant aspect of the new code will require lawyers to do far more than a simple interview to ensure that the schedules are correct. A greater degree of documentation and investigation is required, and the statement of current monthly income must be completed carefully. The cost of a credit report and bring downs or other lien or deed searches can add significantly to the cost of filing bankruptcy.
The practice of bankruptcy has certainly gotten more complicated. The cost of bankruptcy has certainly increased, and likely significantly, to the point that many potential clients can’t afford to file. To add insult to injury, the filing fee for a Chapter 7 Bankruptcy Case is now $299, up from $209 before the Act. The end result is an overall increase of between 40 percent and 75 percent for the fees and costs of filing. Although this may come down as practitioners become more familiar with the new procedures or if there is routinization and competition for market share by fewer attorneys practicing bankruptcy, it is highly unlikely that the fees and costs will decrease to anywhere near the amounts before October 17, 2005. Right now, many consumers, particularly those most in need of bankruptcy relief, are simply too poor to bear the increased costs of filing under the new code.
Christman practices bankruptcy law almost exclusively in the Middle District of Pennsylvania representing debtors, creditors, and trustees. email@example.com.