Consumer Bankruptcy, Doctrinal Issues In

United States Legal Regime

In the United States, two interrelated factors generated renewed debate about consumer bankruptcy. First, there was a staggering and accelerating rise in consumer bankruptcy filings in recent decades. Second, largely in response, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109–8.

Congress established the modern consumer bankruptcy system in the United States with the enactment [Page 276]of the 1978 Bankruptcy Code, which substantially liberalized the consumer bankruptcy system. Article I, § 8, of the U.S. Constitution grants to Congress the exclusive authority to enact “uniform laws on the subject of bankruptcies throughout the United States.” The framers intended this grant of power to Congress in large part to deal with the problems of debt collection under the Articles of Confederation (1776) and, in particular, uncertainty about the authority of various states to discharge debts and whether those debts remained enforceable if the debtor relocated to another state.

Otherwise, traditional debtor-creditor relations were largely unaffected by the new Constitution, including the use of debtors' prisons, which continued in several states well into the nineteenth century. Throughout the nineteenth century, Congress exercised its bankruptcy authority only sporadically, leaving most debtor-creditor relations in the hands of the states. In 1898, Congress enacted the first permanent bankruptcy law in United States history, which remained on the books until superseded by the 1978 Bankruptcy Code, which liberalized the consumer bankruptcy system in the United States by substantially increasing the debtor's eligibility for a fresh start.

Following the enactment of the 1978 Code, there was an immediate surge in consumer bankruptcy filing rates. In response, in 1984, Congress enacted piecemeal reforms designed to stem the tide, but these proved largely ineffectual. Throughout the 1980s and into the 1990s, consumer-filing rates continued to rise. Finally, in the mid-1990s, the rates exploded in the face of unprecedented economic prosperity, low interest rates, low unemployment rates, and rapid gains in household wealth as the result of roaring stock and housing markets. During the 1980s, consumer bankruptcy filings doubled from about three hundred thousand annual filings to just over six hundred thousand, then doubled again to about 1.2 million filings by 2000. In 2004, the final full year before BAPCPA, consumers filed 1.5 million bankruptcy cases.

At the same time, the 1994 congressional elections ushered in a political sea change in Washington, realigning the ideological balance away from the traditional pro-debtor ideology and toward an ideology of personal responsibility, culminating in the enactment of BAPCPA. This statute substantially tightened loopholes in the bankruptcy system. It provided new tools and safeguards against bankruptcy fraud (such as asset concealment) and the strategic use of bankruptcy for such purposes as evading domestic support obligations. It also required filers with above-median income levels who could repay a substantial portion of their debts to do so through a court-approved chapter 13 repayment plan, rather than being eligible for chapter 7.

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