Two law professors recently published an article discussing their research on the following question: Why do so few consumers actually file for bankruptcy when so many more would benefit from filing? See Ronald Mann and Katherine Porter, Saving Up For Bankruptcy, 98 Geo L.J. 289 (2010). Mann and Porter acknowledge that the current raw numbers indicate a near record number of filings. But they maintain that this record number still represents just a sliver of those in severe financial distress who could benefit from filing.
The two professors discussed a variety of interesting issues related to their topic. But I focus here on one point: The authors assert that the underuse of the bankruptcy system is explained, in part, by the high cost of filing. They cite data that “strongly suggest[s] a group of debtors for whom the decision to file bankruptcy is deferred due to a lack of funds.” p. 336.
The authors contend that this problem of high cost was made worse by BAPCPA, the 2005 law that brought substantial changes to the bankruptcy code. They explain: “The current bankruptcy system deters attorneys from offering [] low-cost services because it requires significant paperwork and complex legal counseling for all cases, even those filed by debtors without assets.” p. 338.
To counter this “cost-of-filing” problem the authors recommend a change in the law that would offer low-income, low-asset filers access to a simplified administrative process. They suggest a sliding scale for attorney’s fees, with much lower charges for those debtors who would be unaffected by the means test.
I am not sure that the solution offered by Mann and Porter is the best one. But I do feel that one way or another, a solution should be found. When debtors in severe financial distress have no access to relief this is obviously a problem for everyone. Unmanageable debt takes a high toll on the physical and mental well-being of individuals and their families. Society at large pays a high price as well because families trapped in debt have little incentive or ability to participate in the economic activity of the community.
Congress passed BAPCPA because it was concerned that too many debtors with the ability to pay were improperly discharging their debts. Many commentators have argued since that BAPCPA created a solution for a problem that never really existed in the first place. Be that as it may, Congress must now look in a new direction and solve a different problem. Congress must provide a meaningful escape valve for those low-income, low-asset debtors who simply cannot afford to file for bankruptcy. Creditors should have no objection to such a solution because these debtors will never be able to pay off their debts in any event. Based on current economic conditions, Congress should act now.
Do you agree that the high cost of bankruptcy deters a significant number of filings? If so, what solutions do you recommend?
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