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Will Bankruptcy Lawyers Be Forced to Declare Bankruptcy With the Recent Drop in Filings?

Todd Zywicki's post at Volokh Conspiracy on the large drop in bankruptcy filings for 2006 is generating plenty of comment. Zywicki writes:

As the year closes out, it looks like the final tally for consumer bankruptcy filings for 2006 (the first full post-BAPCPA year) will be about 600,000 or so. Last year the figure was 2 million (in large part because of the pre-BAPCPA spike) and in 2004 it was about 1.5 million. So there has been a drop of roughly 60% from the prior levels.

Zywicki offers three hypotheses for the drop:

1. BAPCPA [Bankruptcy Abuse Prevention & Consumer Protection Act] Hangover: One theory is that the system is still suffering from a BAPCPA hangover, and that everyone who was thinking of filing filed last October before the law went into affect. But this is hard to square with the observation that filing levels stabilized in the spring and have not subsequently bounced back to anything like their preexisting levels ...

2. Increased Cost and Complexity: Another theory is that increased cost and complexity of the system is simply making it more difficult for needy filers to get access to bankruptcy even though they need it. But if this is the case, then one would expect to see a spike in "informal bankruptcies," i.e., defaults by struggling consumers who need to file bankruptcy but are unable to do so for some reason. Yet looking at the Federal Reserve's data on delinquency rates and charge offs on consumer loans, there appears to be no increase in delinquencies on consumerloans, as one would expect were struggling consumers unable to get access to bankruptcy, and a drop in charge offs.

3. A third hypothesis is that despite some hiccups, BAPCPA has been working largely as Congress intended so far in diverting various categories of debtors out of bankruptcy while preserving relief for those who need it.

Most commenters tend to agree with the first two of Zywicki's hypothesis. Another explanation is that the economy has improved, thus reducing the need for bankruptcy filings. Of course, if bankruptcy filings continue to drop at the current rate, there's bound to be a rebound affect, as bankruptcy lawyers start declaring bankruptcy!

Posted by Carolyn Elefant on December 21, 2006 at 06:33 PM | Permalink | Comments (10)

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