Lupica Finds Current Bankruptcy Laws Bad for Creditors

“Creditors have done worse” since bankruptcy laws were amended in 2005

According to a study funded by the American Bankruptcy Institute performed by University of Maine School of Law Professor Lois R. Lupica “Creditors have done worse” since the bankruptcy law was amended in 2005 to enhance recoveries.

Lupica said the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, designed to compel individual bankrupts to pay more through restricting access to Chapter 7, where typically, creditors get nothing and was intended to prevent “the discharge of debt consumers could afford to pay.”

She continued, “The theory that there are can-pay debtors lurking in the shadows was not confirmed by the data.”

According to Lupica, the theory was that more consumers would be forced into Chapter 13, where creditors are often paid a portion of their debts through payment programs spread over roughly five years.

The study found recoveries by unsecured creditors after the 2005 law was enacted fell by “statistically significant” amounts under both Chapters 13 and 7.

Creditor recoveries in bankruptcy were lower due to administrative expenses

According to the study creditor recoveries were lower in part because “administrative expenses increased significantly.” Lupica said “there were no winners,” and went on to say there wasn’t even the expected increase in recoveries by secured creditors.

The Study cited a separate study that showed Chapter 7 costs increased for each bankrupt by an inflation-adjusted $488 after the 2005 amendments and by $667 in Chapter 13. The average fee for a Chapter 7 filing rose 38 percent after the amendments and 63 percent for Chapter 13.

“Some scholars have claimed that the credit lobby knew” recoveries would decline in bankruptcy despite the changes, Lupica said, citing Professor Ronald J. Mann of Columbia Law School.

Lupica continued that rather than increase recoveries, the intention was to create a “sweat box” through keeping individuals out of bankruptcy “to receive the robust recoveries that seem to elude them once a consumer files for bankruptcy relief.”

Lupica wasn’t surprised by the findings. “The data confirmed my intuition developed from speaking with hundreds of bankruptcy trustees and judges,” she said.