Trends in Arizona Bankruptcy Filing
About 95% of all bankruptcies are filed by individuals every year. Most consumer bankruptcy filings are Chapter 7 filings, usually about 65%. Additionally, many filers in Chapter 13 end up not completing their plans or reaching discharge, and have their cases converted to Chapter 7.
When Congress passed amendments to the Bankruptcy Code in 2005, it sought to address potential fraud by consumer bankruptcy filers. Many believed that a huge number of the bankruptcy filings every year were by people who could afford to pay more to their creditors, but instead chose to file Chapter 7 bankruptcy and just wipe clean all unsecured debt. To address this issue, Congress created a presumptive abuse test, which measured a filer’s monthly income against an average monthly income for a family of that size and location. If a filer’s income was above that number, they were presumed to be able to pay creditors in a Chapter 13 plan, and were considered abusers by instead filing for Chapter 7.
Whether or not this was true, it has led to a decrease in filings. In 2005, many believe in anticipation of the law, there were over 2 million filings. The next year, when the new laws took effect, there were only about 600,000. Since then, filings have increased steadily, but not back to their pre-2006 levels, despite a worsened economy.
One possible explanation for this decrease is the 2005 amendments. Because of the new laws, many potential Chapter 7 filers are faced with the choice of filing for Chapter 13 or nothing at all. And for many other potential filers, the daunting process of a three to five year plan is unappealing.
Additionally, it is worth considering whether we want more people filing for Chapter 13. It is estimated that between 85 and 90 per cent of Chapter 13 cases fail. With such a large failure rate, it seems obvious that most debtors will not receive a discharge in Chapter 13. So the result of the new laws has been to limit the number of bankruptcy discharges granted every year. Whether this is a good or bad thing certainly depends on who is being forced out of Chapter 7 by the presumed abuse test, and whether the test is scaring away debtors who really need bankruptcy.
For more information regarding bankruptcy contact an experienced attorney.