The Wall Street Journal article I referred to in my post on what debtors should do when they’re too poor to afford bankruptcy filing fees cited a pair of articles by the Federal Reserve Bank of New York that I missed. In 2015 the branch explored the effects the 2005 Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA) had on insolvency and foreclosure. The authors wanted to know whether the BAPCPA made bankruptcy too costly for destitute debtors. The answer, discouragingly, appears to be yes, but the authors go on to explain what the consequences are for debtors who cannot file New York bankruptcy: chronic unpaid debts and profits for banks.
The first article began by tracking the probabilities that debtors’ financial circumstances would transition from delinquent to bankrupt, insolvent, or current. The authors found that the probabilities that debtors in the delinquent category would transition to current (without foreclosure) or bankrupt (without foreclosure) fell significantly after the BAPCPA went into effect. Notably, debtors with credit scores in the lowest 20 percent did not transition to bankruptcy during the Great Recession while most other delinquent debtors did. Meanwhile their foreclosure rates increased just the same, indicating that debtors simply endured insolvency and foreclosure because they were too poor to file bankruptcy. The authors tied these findings to the fact that low-credit-score debtors tend to have low incomes, and the rise in bankruptcy filing costs throughout the United States.
From there the article posed an interesting question: What’s the difference between filing bankruptcy and simply living with insolvency? Quite a bit, apparently. Insolvent debtors saw increases in both their balances in collections and court judgments against them—both of which are easily prevented by bankruptcy’s automatic stay. Debtors who file bankruptcy also are able to access credit-card accounts while insolvent debtors cannot. Finally, debtors exiting bankruptcy have much higher credit scores than insolvent debtors—around 100 points.
In the second, shorter article, the researchers explored whether financially distressed debtors were substituting foreclosure for bankruptcy. They answered in the affirmative, adding that the BAPCPA probably amplified the housing and mortgage crisis.
It’s one thing if the BAPCPA didn’t achieve its goals, but it’s another thing entirely if it impoverished debtors, promoted foreclosure, and increased banks’ profits. It does, however, show the value of New York bankruptcy. As I wrote in the earlier post: Bankruptcy filing fees can be paid on an installment plan or waived. If you are insolvent or nearing insolvency, then discussing your financial situation with an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.