Abuse or Protection?

Abstract

Bankruptcy policy balances conflicting objectives of providing consumption insurance to debtors and protecting creditors. The adoption of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act shifted the balance toward creditors by raising debtors' cost of filing for bankruptcy and reducing the amount of debt that is discharged in bankruptcy. The changes will have little effect on "opportunistic" debtors, who can still use pre-bankruptcy planning shelter substantial assets in bankruptcy. But the changes are likely to harm many non-opportunistic debtors - the people whom bankruptcy law is intended to help - simply because they cannot afford the high cost of filing. A better policy approach would be to require debtors to use of portion of both their wealth and future income to make payments on their debt, which would protect non-opportunistic debtors while deterring opportunism.

Keywords: bankruptcy law, BAPCPA, debtor, creditor, consumption insurance, credit availability, bankruptcy, opportunistic debtors, non-opportunists

JEL Classification: D78, H26, H29, I30, K39, K41, L51