The following is an article reprinted with permission from the Summer 2007 edition of The WWR Letter:
Bankruptcy Filings: Down and Up
By: Jack Day, Esquire
After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect on October 17, 2005, filings dropped off 95%, but have since increased steadily. In 2006, bankruptcy filings were down 70% compared to 2005. However, 2005 included the increased filings that occurred shortly before BAPCPA went into effect. When compared to the average number of cases filed from 2001 to 2004 (1,565,000), the filings for 2006 represent a 60% drop. This is still a dramatic drop.
The recovery in filings has been more pronounced in the Midwest. In the Northern District of Ohio, through June 30, 2007, filings are currently at 46% of the pre-BAPCPA levels (June 2004).
The other change resulting from BAPCPA was a temporary increase in Chapter 13 filings. Historically, approximately 23-26% of consumer bankruptcies are Chapter 13s and 74-75% are Chapter 7s. In November 2005, those numbers were reversed. Presumably, the vast majority of those needing to file Chapter 7 bankruptcies had filed before BAPCPA took effect. The pool of possible Chapter 7 filers was depleted. Since then, the causes of new bankruptcies continue: divorce, reduced income, job loss, illness and overspending. The pool of Chapter 7 candidates is replenishing and the percentage of Chapter 7 filers as compared to Chapter 13 filers is increasing. In the Northern District of Ohio, for June 2007, 30% of new petitions were Chapter 13s and 70% were Chapter 7s. These numbers are nearly back to normal.
It is not known when total filings will return to normal levels, but the trend of increased filings continues month after month. WWR will continue to monitor the filings and report our findings to you on That Credit Union Blog and in future issues of The WWR Letter.
One significant change under BAPCPA is the 910-day car rule. If the loan is secured by a purchase money security interest in a vehicle and the loan is issued less than 910 days before the debtor files a Chapter 13, then the debtor may not “cram down” the vehicle. The debtor must pay the lender the balance due on the loan plus interest. Under the old rule, the debtor only paid the value of the vehicle, plus interest. Most courts used the average between wholesale and retail NADA to determine the value.
Even though BAPCPA includes the 910-day rule, many debtors continue to file Chapter 13 plans which attempt to cram down the value of vehicles. If the lender does not object to the plan, and the plan is confirmed, then the debtor will only pay the amount listed in the plan. The creditor may lose thousands of dollars.
Another issue that has come up is debtors proposing an interest rate that is too low. Under the Supreme Court’s Till decision, the debtor should pay interest at the prime rate plus an additional risk factor of about 1-3%. If the creditor does not object to the interest rate, then the Trustee will pay the lower interest rate listed in the plan.
With Chapter 13 plans, it remains very important to carefully review them and to file objections when necessary. Don’t forget, the same objection deadlines still apply.
Jack Day is a Partner in the Bankruptcy department of the Cincinnati office. He can be reached at (513) 723-2206 or via e-mail at firstname.lastname@example.org.