Bankruptcy is Not About Gaming the System: Only a Fraction of Those in Need Are Filing

As to be expected in tough economic times, personal bankruptcy filings are up. In 2005, when new bankruptcy laws went into effect, a record number of two million people filed for bankruptcy. Projections for 2010 suggest that filings will be close to this record number, at 1.7 million this year. To some those numbers may sound alarming, but experts fear that too few people in need are actually filing for bankruptcy protection.

In 2005, Congress changed the bankruptcy laws based on evidence, anecdotal or not, that too many people were abusing the system. Banks and credit card companies lobbied for the changes to make it more difficult for debtors to file for Chapter 7 bankruptcy protection that would have allowed them to discharge most of their unsecured debt.

But with unemployment holding at over nine percent for 14 months in a row, concerns of people filing for bankruptcy to "game the system" are long gone. The present law places more restrictions on filing and increases the filing fees from $209 to $299, making it too expensive for many to file. With added paperwork, the average attorney fees have also increased from $712 to $1,078, adding to financial restrictions. Debtors are also required to attend pre-bankruptcy credit counseling and provide six months of income information and two years of tax returns.

Student loan defaults and mortgage foreclosures are rising, and bankruptcy laws do little to assist debtors in relieving them of crushing financial obligations in these areas. Nearly 40 percent of private subprime student loans are projected to default, and they are not dischargeable in bankruptcy under present law. While filing fees can be waived and student loans discharged if undue hardship is proved, debtors have a substantial burden of proving hardship and would likely have to withstand a costly trial before an unsympathetic court if trying to discharge their student loan.

Former students saddled with tens of thousands of dollars in student loans costing them hundreds of dollars per month are unable to purchase homes or cars, take vacations or even eat out. Many students choose to forgo college or continue their education fearing sizable student loans and are forced to take jobs that pay far less than an advanced education would have provided, creating a negative economic ripple effect and a less skilled and educated labor force.

Many who have filed for bankruptcy and applied for assistance under the federal Home Affordable Modification Program were turned down because they filed for bankruptcy. The Treasury Department has since made changes to the modification program to prevent discrimination based on prior bankruptcy filings. However, for many homeowners, losing their home may be inevitable. In such circumstances and despite other large debt, many of these homeowners see no benefit in filing for bankruptcy protection.

If you have been considering filing for bankruptcy but you have been reluctant to move forward, contact an experienced bankruptcy attorney for advice on your debt relief options.