In 2005, the U.S. Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, the first major change in bankruptcy law since the liberalization of consumer access to chapter 7 liquidations in 1978. The act restricted access to Chapter 7 liquidations to persons or households below the median income of their state and to those whose “priority debts” are particularly burdensome. Among other changes, the Act limited state homestead exemptions for all filers to $125,000 (to be adjusted periodically) for homes acquired less than 40 months before filing.
The effect of the act on filings was enormous. Well in excess of what was anticipated. This study develops a time series model to identify the effects of the act. The model identifies both a fleeting, “beat the deadline,” effect and a long-lasting reduction in the rate of filings. The combination of these effects was to, first, increase filings and, then, decrease them. The decrease was dramatic and appeared to be even more so because of the “beat the deadline” rise in filings that preceded the decrease. The model also isolates additional transitional and permanent effects in those states that had generous domiciliary exemptions.