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Apologies if this isn't the right Stackexchange forum, I will be happy to move it if required.

I was reading the Federal Reserve Bank of New York's latest quarterly report on Household Debt and Credit and was surprised to see that the number of personal bankruptcies declared in the United States was significantly higher in 2003-2006 (the report doesn't go back beyond 2003) than the financial crisis in 2008-2010.

What happened in this time frame that could have caused so many personal bankruptcies in the United States?

Bankruptcies 1

Bankruptcies 2

  • I'd particularly like to know what happened just before Q1 of 2016. A particularly expensive Christmas? – Erin B Feb 12 at 20:25
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    @ErinB I assume you mean Q1/2006? I suspect a change in bankruptcy law. There's no discontinuity in the number of foreclosures, which otherwise track pretty closely with the number of bankruptcies. The large spike at the end of 2005 seems exactly what would happen should a change in law making bankruptcies more difficult be about to take effect on 2006. – Just Me Feb 12 at 20:51
  • @JustMe that is what I meant, and that's probably exactly what happened! – Erin B Feb 12 at 20:55
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The Bankruptcy Abuse Prevention and Consumer Protection Act took effect in October 2005.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Pub.L. 109–8, 119 Stat. 23, enacted April 20, 2005), is a legislative act that made several significant changes to the United States Bankruptcy Code. Referred to colloquially as the "New Bankruptcy Law", the Act of Congress attempts to, among other things, make it more difficult for some consumers to file bankruptcy under Chapter 7; some of these consumers may instead utilize Chapter 13.

It was passed by the 109th United States Congress on April 14, 2005 and signed into law by President George W. Bush on April 20, 2005. Most provisions of the act apply to cases filed on or after October 17, 2005.

Provisions

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) made changes to American bankruptcy laws, affecting both consumer and business bankruptcies. Many of the bill's provisions were explicitly designed by the bill's Congressional sponsors to make it "more difficult for people to file for bankruptcy." The BAPCPA was intended to make it more difficult for debtors to file a Chapter 7 Bankruptcy—under which most debts are forgiven (or discharged)--and instead required them to file a Chapter 13 Bankruptcy—under which the debts they incurred are discharged only after the debtor has repaid some portion of these debts.

As "most debts [would be] forgiven" under Chapter 7 bankruptcies prior to Oct 2005, the spike in bankruptcies in that quarter is almost certainly driven by persons filing bankruptcies before the new law "[made] it more difficult".

From the Wikipedia page linked above:

Presumption of abuse

Prior to the BAPCPA Amendments, debtors of all incomes could file for bankruptcy under Chapter 7. BAPCPA restricted the number of debtors that could declare Chapter 7 bankruptcy. The act sets out a method to calculate a debtor's income, and compares this amount to the median income of the debtor's state. If the debtor's income is above the median income amount of the debtor's state, the debtor is subject to a "means test."

Also, this change seems significant (bolding mine):

Nonpresumed abuse

Even in cases where there is no presumption of abuse, it is still possible for a Chapter 7 case to be dismissed or converted. If the debtor's "current monthly income" is below the median income, as discussed above, only the court or the United States trustee (or bankruptcy administrator) can seek dismissal or conversion of the debtor's case. If the debtor's "current monthly income" is above the median income, as discussed above, any party in interest may seek dismissal or conversion of the case.

After this change in law, any creditor could force dismissal or conversion of the bankruptcy should the person declaring bankruptcy make more than a certain amount of money.

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