Robert M. Lawless, an Illinois professor of law, is a well-known expert in corporate law and has published widely in the fields of consumer credit and bankruptcy law. He writes for the blog Credit Slips. He was interviewed by the News Bureau's business and law editor, Mark Reutter.
Congress passed the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act because of widespread concern that the bankruptcy system was too lenient and was being abused. Has the new law curtailed the number of personal bankruptcy filings?
Actually, there was not widespread concern that the bankruptcy system had become too lenient. That was a line that the consumer-credit industry fed to Congress, and it proved to be an effective lobbying position. Bankruptcy experts did not believe abuse was widespread. Bankruptcy filing rates have grown steadily along with the explosion of consumer credit in the last 25 years. Nevertheless, the consumer-credit industry got what it wanted. The new law makes it much more difficult and costly for consumers to file bankruptcy to relieve themselves of debt that they have no realistic hope of repaying.
Given the reduction in filings, do you consider the law a success?
No. Success should be measured by the financial well being of the middle class, and Congress did nothing to relieve the pressure faced by many consumers who cannot meet their living costs without running up punishing levels of credit-card or other debt. Blaming the bankruptcy system for bankruptcy filings is like blaming hospitals for serious illnesses. In enacting the new law, Congress did little but close the hospital that treats financial distress.
What are the most common reasons behind personal bankruptcy?
In my research, we survey and interview people who file for bankruptcy. We find that an overwhelming majority of filers have experienced a major medical problem, lost their jobs, or have undergone a divorce. A large number of filers are divorced women and single women with children.
Do you foresee an increase in bankruptcy filing rates?
During 2006, there were about 585,000 bankruptcy filings in the U.S. On a monthly basis, bankruptcy-filing rates currently are maybe 50 percent of what they were before the law was passed, but that figure has been trending upward each month. I expect bankruptcy-filing rates will continue to increase, although I do not think they will soon reach the levels they were before the 2005 statute. It is important to remember, however, that these rates are a symptom of financial distress, not a cause of it.