The Consumer Financial Protection Bureau published its quarterly consumer credit trends report on September 25. In the Report, the CFPB gave an in-depth look at bankruptcy trends and the impact of filing for the period 2001-2018, which includes the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) and the Great Recession.
The CFPB Report focuses on consumers who filed for bankruptcy protection under Chapters 7 or 13 of the United States Bankruptcy Code. Under a Chapter 7 bankruptcy, a debtor’s non-exempt assets are liquidated in order to repay creditors, and any remaining debt is generally discharged. (Some debts are not dischargeable in bankruptcy. They include, but are not limited to, student loans whose payment would not impose an undue hardship; debts resulting from fraud on the part of the debtor; and domestic support obligations. See 11 U.S.C. § 523(a)(8)(B); 11 U.S.C. § 523(a)(2)(A); and 11 U.S.C. § 523(a)(5).) Under a Chapter 13 bankruptcy, a debtor usually enters a three- or five-year repayment plan to repay a portion of their debt based upon their income. Upon successful completion of their plan, the debtor’s non-mortgage debt is generally discharged. (Not all non-mortgage debt is dischargeable in Chapter 13. See 11 U.S.C. § 1328(a).)
The information regarding the use of the bankruptcy system and its effects is pivotal to understand the role bankruptcy plays in aiding consumers’ recovery from financial difficulties, the bankruptcy/debt collection dichotomy, and how filing for bankruptcy affects the cost and availability of credit.
A few key findings from the Report include:
- Most personal bankruptcy filings result in a dismissal or a discharge. A dismissal occurs if the debtor fails to meet the requirements set forth by the bankruptcy court. If a debtor files a Chapter 7, it is a safe bet that the debtor will receive a discharge, which takes about four months from filing the petition. If a debtor files a Chapter 13, they have less than 50 percent odds of completing their repayment plans. At no point in the timeframe analyzed by the Report have discharges for Chapter 13 exceeded dismissals.
- In each year from 2001 to 2004, Chapter 7 bankruptcies made up about 75 percent of personal bankruptcy filings. BAPCPA took effect in October 2005, establishing a means test to qualify for filing under Chapter 7. This means that for those with income above a certain limit, they would have to file a Chapter 13 instead of a Chapter 7. This created a rush to file Chapter 7 in the weeks prior to October 17, 2005, increasing the share of Chapter 7 filings to 80 percent of all personal bankruptcy filings that year. Chapter 7 filings immediately dropped in 2006 to around 60 percent, but the percentages increased in the years leading up to the Great Recession, reaching those pre-BAPCPA levels of around 75 percent in 2009 and 2010. Since that time, Chapter 7 filings have consistently declined, appearing to have stabilized at about 63 percent of personal bankruptcy filings – 14 percent lower than in 2001.
- After the passage of BAPCPA, personal bankruptcy filers’ median credit score one year prior to filing bankruptcy increased each year until 2009. After 2009, filers’ median credit score one year prior to filing dropped precipitously in 2010 and continued a negative trend until 2013 for Chapter 13 and 2014 for Chapter 7, likely due to financial difficulties filers faced during the Great Recession which lowered credit scores.
- During the Great Recession, personal bankruptcy filers were facing more than twice the mortgage debt than debtors filing before and after the Great Recession. Student loan debt has steadily increased from 2001 to 2018 for those filers, which is consistent with the increase in the number of outstanding student loans for that time period.
- Median credit scores increased for both Chapter 7 and Chapter 13 filers after filing a bankruptcy petition. Chapter 7 filers receive a quick rise in the first few years as opposed to Chapter 13 filers, likely because a Chapter 7 is discharged in an average of four months, as opposed to Chapter 13 filers’ three- or five-year plan, and the higher likelihood of receiving a discharge in Chapter 7 than Chapter 13. Unfortunately, those filers who filed between 2001 and 2004 were affected by the Great Recession, slowing the recovery in median credit scores.
Because of the proximity between the enactment of the BAPCPA and the beginning of the Great Recession, the CFPB was unable to differentiate the effects each had on bankruptcy filers’ credit scores and debt levels. The CFPB indicates that more research is needed to understand the full ramifications of the BAPCPA.
Troutman Sanders will continue to monitor emerging developments.