The Death of Consumer Bankruptcy in the United States?

Abstract

Both houses of Congress have overwhelmingly passed a major bankruptcy reform bill, and President Bush supports the reform; all that remains for the bill to become law is for a few differences in the two chambers' bills to be resolved in conference. For now, the conference has been postponed as Congress focuses on responding to the terrorist attacks. Once that immediate crisis is past, though, Congress will be able to revisit the bankruptcy bill.

The bankruptcy reform bill would reshape dramatically the contours of consumer bankruptcy for individual debtors, making bankruptcy relief much less available to and harsher for individuals. The most significant new constraint in the pending bankruptcy bill is the "means test," which is a gate-keeping device designed to exclude from chapter 7 those debtors who have a modest ability to repay some debts out of net future income. Excluded debtors would be left with the choice of forgoing bankruptcy relief or proceeding under a payment plan in chapter 13. In this article, Professor Tabb first examines the political origins of the means test and shows how it departs from the traditional model of consumer bankruptcy in the United States. Tabb critiques the proffered justifications for the means test in principle, and then dissects the means test as constructed in the pending legislation, demonstrating the test's many problems. Tabb proceeds to demonstrate several other ways in which the reform bill hurts individual consumer debtors. He concludes by pointing out how this bill, even though disfavored by a substantial majority of Americans, has achieved equally overwhelming support in Congress through a combination of intense lobbying and exceedingly generous campaign contributions.