Who Files for Bankruptcy?
In the last three decades, bankruptcy filings in the U.S. have risen from just over 330,000 in 1980 to over 1.2 million last year. Although it is impossible to identify all of the reasons with precision, the increases have been generally attributed to a number of factors, including the exporting of once abundant manufacturing jobs, the shrinking of the middle class, increased availability of credit, and changing social perceptions of bankruptcy. What the public sees, though, is simply more people “going broke,” leading many to wonder, “Who is filing for bankruptcy?”
As a bankruptcy attorney, I regularly hear this question from others outside of my profession. Sometimes the question is asked with genuine compassion and a desire to understand the process a person goes through in making such a significant decision. Other times, I sense the question arises out of a combination disbelief and disapproval that a person might seek the protection of the legal system instead of simply paying his or her debts. I understand and can appreciate both perspectives.
Regardless of the motivation behind the question, though, my answer is always the same: anyone might choose to file a bankruptcy at any time. Bankruptcy clients can be old or young, with low income or high income. Truly, there is not a typical client. The only common characteristic among my clients is that is that each one has more debt than he or she can manage. While the typical client is difficult to pinpoint, the events that lead that client into my office are not. Without question, bankruptcy commonly arises after one of the following: job loss or interruption of income, unforeseen medical trauma, or divorce.
Origins of Bankruptcy in the U.S.
Many are surprised to learn that the roots of the American bankruptcy system are found in the U. S. Constitution. Article I, in fact, specifically grants Congress the power to enact “uniform laws on the subject of bankruptcies.” Having a uniform federal system to regulate debtor and creditor relations made good sense to the framers as it was expected to promote interstate commerce if the parties involved did not have to manage a myriad of state specific laws on the subject. Despite the Constitutional language, permanent bankruptcy laws did not go into effect until 1898 when the Bankruptcy Act was passed. Prior to that time, many of the states had their own laws regarding debtor and creditor relations — some with very harsh results, commonly including debtors’ prisons until about the mid-1800s.
With the passage of the Bankruptcy Act of 1898, a framework of laws was developed in an attempt to fairly treat both creditors and debtors in dealing with issues of insolvency. While a primary goal was the protection of creditors’ rights, the process was also intended to encourage the entrepreneurial spirit and capitalism. With bankruptcy protections in place, individuals had more freedom to initiate ventures that might become profit making and grow the economy while having in place the safety net of bankruptcy should the parties involved fail. Bankruptcy was also designed to offer a fresh start to individuals overwhelmed by personal debt so that they might be productive and contribute again to the economy rather than being a drain on the system either locked away in a debtors’ prison or forced into an underground economy to avoid collections.
Separating Fact from Fiction in Bankruptcy
Modern bankruptcy offers its clients protection from some types of debts, but that protection comes at a cost. For example, in a Chapter 7 bankruptcy, a debtor is permitted to keep his or her property only to the extent that it is exempt from creditors. In Virginia, our exemption laws are some of the most meager in the country and leave bankruptcy clients with very little in the form of assets. In a Chapter 13 bankruptcy, debtors essentially pay for the discharge of their debts through a court ordered repayment plan. Depending on the income and assets of these clients, the repayment plans can be substantial in many cases.
In exchange for its protections, bankruptcy also mandates that debtors disclose every aspect of their financial condition to ensure creditors are treated as fairly as possible. This can be humbling for a person going through the process and requires an inventory of every item of property owned by the debtor, from savings accounts to clothing, as well as a description of financial transactions dating back years before a bankruptcy is even filed. Despite its portrayal at times by Hollywood, bankruptcy is most definitely not an opportunity to defraud creditors and hide or misrepresent assets. Serious penalties, including up to 5 years in prison and significant fines, await any debtor who makes false statement or conceals property during the process.
Ultimately bankruptcy is part of the safety net that protects individuals in our modern economy. While debtors may ultimately find relief through the bankruptcy process, no clients happy to schedule that first appointment with a bankruptcy attorney nor are they happy to file for bankruptcy. Of course, the opportunity for abuse exists, but the process has significant protections in place to guard against such a result.