A new study by the Federal Reserve and Columbia University shows that the 2005 bankruptcy “reform” intended to curb perceived, but not necessarily verifiable, abuse of the bankruptcy system has drastically harmed lower income consumers. The law, formally titled the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, made it more difficult for consumers to file bankruptcy and increased the costs of both filing and attorney fees by complicating the process. The study lays out the impact of the legislation on consumers and shows that while bankruptcy filings have decreased, many consumers are far worse off as a result.
How the Reform Law Changed Bankruptcy
The 2005 legislation added more paperwork to the filing including the Means Test and added a caveat the attorneys could be held accountable for inaccurate filings. These changes increased monetary costs to file by nearly 40%. It also made it much more difficult for consumers to qualify for Chapter 7 bankruptcy, the chapter best suited to allow consumers to rehabilitate their finances and get a fresh start. The bottom line is that bankruptcy benefited credit card companies and banks but ruined the chance for consumers who most needed relief to get the help they need.
Who Has Suffered the Most from Bankruptcy
“Reform
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Because of the increased filing fees and paperwork that forces greater overall costs to file, many lower income Americans who truly need the relief that bankruptcy offers can no longer use this safety program. Study authors Stefania Albanesi from the Fed and Jaromir Nosal from Columbia University wrote: “Our analysis suggests that the 2005 bankruptcy reform caused a decline in bankruptcy filings, which were replaced by a sizable rise in insolvency and foreclosure.” What this means is that changing bankruptcy laws didn't stop people from abusing the system. In fact, there was no significant “abuse” of the prior system. What did happen was that it increased foreclosures and left a segment of consumers with no hope for a better financial future.
What This Means for You
For those that can't afford to file bankruptcy and also can't afford to get out of their financial slip, the consequences are disastrous. It's a trap where the consumer will continue to be in collections, see liens placed on their property and likely lose their home to foreclosure. It leaves to a never ending cycle of stress, debt collectors threatening you and is no way to live. It can prevent consumers from getting the jobs they need and from having a home, savings and financial security. Not only is this bad for the individual consumer, but it's also bad for our economy. If a significant segment of the population can't participate in the market, it slows the economy and we all suffer.
If you think you're in a position where you can't afford to file bankruptcy, don't give up hope on getting the relief you need. We offer zero down bankruptcy programs for cash-strapped consumers so that you can put an end to collections and get some peace of mind. This can give you the break you need so that you can start saving and rebuilding your credit and finances. Let us help you get the financial fresh start that you deserve.
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