In 2015, 844,495 bankruptcy cases were filed, down from 1.4 million in 2011. Getting accurate statistics on the age of bankruptcy filers is difficult, as filers are not required to disclose their age. Several studies suggest that increasing numbers of older people are filing for bankruptcy. A number of studies have shown that consumer and medical debts are predominant factors in personal bankruptcies and that bankruptcies usually rise in periods when consumer debt increased faster than income. Job loss and high medical costs are primary contributors to the rise in bankruptcy filings. According to the National Conference of Bankruptcy Judges, younger and older debtors alike cite employment-related problems as the most common cause of financial difficulty.
Personal bankruptcies are generally filed under Chapter 7 or Chapter 13 of the US Bankruptcy Code. A Chapter 7 bankruptcy, the most prevalent, allows an individual to discharge unsecured debt after selling nonprotected assets to pay creditors. In a Chapter 13 bankruptcy, individuals seek to restructure their debt so they can catch up on their home mortgage, car loan, or similar secured debt over a period of three to five years, with the goal of restoring their financial stability and keeping their home and other vital possessions.
In 2005 Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The law includes a number of restrictions that make it more difficult to file Chapter 7 bankruptcy, in effect leaving debtors with little choice but to enter repayment agreements with creditors through a Chapter 13 bankruptcy. It also requires credit card companies to offer customers some information about the potential impact on debt burden if they make only minimum monthly payments.
BAPCPA does not address the lack of homestead protection for residents of manufactured housing—which is more prevalent among lower-income groups and older Americans—and seems to exacerbate the hardship. The law limits the ability of Chapter 13 filers to receive a court-ordered reduction of a mortgage when it is larger than the appraised value of the manufactured home (also known as cramming down). It also removed a bankruptcy judge’s discretion to reduce the petitioner’s indebtedness by the amount of the purchase price of a manufactured home, requiring instead the use of the home’s market value at the time of filing. Manufactured homes generally depreciate in value over time (see Chapter 9, Livable Communities—Manufactured Housing).
Under BAPCPA, assets held in qualified retirement plans (such as 401(k), profit-sharing, thrift money purchase, employee stock ownership, and defined-benefit plans), 403(b) plans, and 457(b) plans of state and local governments are entirely protected. BAPCPA also protects traditional and Roth individual retirement accounts (IRAs) of up to $1 million without regard to rollover amounts. It also protects various employer-provided plans such as Keogh plans, savings incentive match plan for employees (SIMPLE) plans, and simplified employee pension (SEP) plans, which are used by smaller business or the self-employed.
The law also excludes amounts withheld from wages by an employer, or received from an employee, as a contribution to: a benefit plan that is subject to the Employee Retirement Income Security Act or a similar government plan, a deferred-compensation plan and tax-deferred annuities under the Internal Revenue Code (IRC), or a health insurance plan regulated by state law. Rollovers from one IRC qualified account to another do not affect the account’s exempt status.
Allowing consumers who are on the brink of losing their homes more flexibility to restructure their loans in bankruptcy would decrease the number of people who enter foreclosure. Bankruptcy courts are currently prohibited from modifying terms of loans on primary residences. By allowing courts to write down the principal balance of a mortgage loan to the value of the mortgaged property, many families would be able to stay in their homes. Lenders would recover at least the same value they could obtain through a foreclosure sale, and at a lower cost.
Maintaining fairness in bankruptcy courts
Federal bankruptcy law should maintain access to bankruptcy protection for legitimate petitioners, especially those with low and moderate incomes.
Bankruptcy courts should not be a forum for creditors to enforce unfair or abusive loan terms.
Bankruptcy courts should have the authority to modify mortgage loans on primary residences, particularly in areas where property values are depreciating or where fraudulent appraisals have occurred.