The Bankruptcy “Reforms” of 2005: Creation of a New Debtor’s Prison?

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An article by law professor Linda Coco, “Debtor’s Prison in the Neoliberal State: ‘Debtfare’ and the Cultural Logics of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” (hat tip Michael Hudson) is a an informative, if disheartening, overview of the significance of the bankruptcy law reforms implemented in 2005.

Debtor’s Prison in the Neoliberal State

One might cynically observe that after 25 years of making it easier for consumers to borrow and encouraging them to load up, banks realized that they might have too much of a good thing and realized they needed to improve their ability to extract payments from the credit junkies they had created. But the passage of the 2005 law had been a prize the financial services industry had chased for over a decade. Credit card company MBNA (later bought by Bank of America) was one of the most aggressive backers of the bill. MBNA had penciled out that the new law would increase its profits $85 million a year, by extracting an extra $100 a month on average from consumers in bankruptcy.

As Coco points out, bankruptcy expert Elizabeth Warren said the new law would destroy the consumer bankruptcy system. It greatly restricted access to Chapter 7 bankruptcies (which apply all consumer funds, ex retirement accounts, to existing debts and wipes out the balance) and also made certain types of debt non-dischargeable, most important, student loans (note the change applied to private student loans). It also created hurdles to filing bankruptcy by making the process more costly: higher court charges and attorney fees, as well as requiring useless but borrower-paid credit counseling. As Jialan Wang noted in VoxEU, these changes increased the cost of filing for bankruptcy by 60%. She and her co-authors of a NBER paper found that this had the intended effect of inhibiting families from filing for bankruptcy, and getting an extra chunk of cash (they looked at tax rebates) led to an uptick in bankruptcy filings. She noted:

Liquidity-constrained households are likely to have the most to gain from bankruptcy, yet they are the ones screened out by high fees. Moreover, the increased costs do little to mitigate strategic behaviour such as OJ Simpson’s notorious purchase of an expensive home in Florida to exploit that state’s generous bankruptcy provisions.

This is only one piece of a bigger picture, and Coco sees the overall impact as a major shift between creditor and borrower rights, the creation of “debtfare”:

Under the guise of preventing abuse, BAPCPA imposes a litany of confusing procedures and requirements on consumer debtors and their counsel; therefore it contravenes the purpose of the 1978 Code which sought to provide debtors with a clean slate and a fresh start. BAPCPA destroys a “safety valve [for society] to deal with financial consequences of misfortunes,” and it undermines “one of the few areas of consumer law that works reasonably well to meet consumer needs.” BAPCPA successfully frustrates the operation of the 1978 Code, because it manifests fundamental changes in the class and power structures of the U.S. economy….

Free-market policy and the practice of deregulation facilitated enormous debt loads which resulting in a socio-economic experience of “debtfare”52 for the average American.53 Debtfare is interlocking payment obligations that last for years, such as mortgage payments, credit card payments, car loan payments, and other monthly debt obligations. Debtfare is a socially constructed trap. Political scientists Genevieve LeBaron and Adrienne Roberts explain debtfare as structures “that lock people’s current and future life choices and possibilities into unequal and unfree capitalist relations and limit their social and physical mobility within these relations.”54 BAPCPA supports the structures of debtfare by limiting the possibility of a discharge of debts and by regulating the manner, form and amount of debt repaid. By forcing repayment to lenders both inside and outside the bankruptcy system, BAPCPA mandates a lifestyle of austerity for middle class debtors. Thus, the insidious effect of BAPCPA is the creation of a large group of Americans servicing burdensome debts without any relief.

Consider how this works in practice. In the word before 2005, lenders had more incentive to restructure the debts of overextended individuals. Now the power has shifted decisively in their favor. While the original consumer bankruptcy law assumed the borrower was a good faith actor who had fallen on hard times, the 2005 revisions presume the stressed borrower is operating in bad faith, legitimating more punitive standards. It’s more costly for the borrowers in the most duress to file for bankruptcy. And the ones with higher incomes go into a 60 month straightjacket if they can work out a repayment plan. Those are based on budgetary norms from another planet. I recall learning in the mid 2000s (I had several tech friend who either had filed for bankruptcy or considered it) that the food expenditures allowed for a single person in Manhattan was $200 a month. The result is that many borrowers continue to struggle to pay make payments outside of bankruptcy and some file for bankruptcy (and not all make it through the more draconian repayment requirements).

Coco describes the overall impact:

BAPCPA’s impact on the middle class is effectuated in many areas. First, the Act seeks to re-moralize consumer debt relations and reignite and re-enforce notions of social stigma denying debtors access to a fresh start. Second, the Act creates increased fiscal and procedural barriers to entry for the consumer in financial distress. Third, once in the bankruptcy system, trap doors and pitfalls work to ambush the unwary or the unrepresented resulting in needy debtors falling out of the bankruptcy system and losing the protection of the automatic stay. Fourth, after the debtor survives the initial filing requirements, scrutiny of the debtor’s income and expenses to determine the disposable income and the kind of relief, if any, available to the debtor. Finally, BAPCPA reduces the “fresh start” benefits of bankruptcy by requiring repayment plans and reaffirmation agreements, making more debts non-dischageble, limiting dischargeability of debts, and limiting dollar amounts of exempt property. In effect, BAPCPA’s mandated austerity reduces the overall benefits gained from the bankruptcy process.

Borrowers can also simply stop paying lenders and wait out the statute of limitations in their state. But as we’ve observed in other posts, debt collectors are becoming far more aggressive, including finding ways to get non-payers jailed (not for the debt per se, but for failing to show up for a hearing, with the debt collectors often found not to have given proper notice).

Most members of what remains of the middle class view debt slavery as someone else’s problem, the result of greed or at best bad planning. But Elizabeth Warren’s research found that most bankruptcies were the result of job losses, medical emergencies, and divorce. It’s easy to be moralistic and not recognize that our hold on financial security is largely illusory. But the campaign to stigmatize borrowers in trouble has been effective, and it will take a concerted effort to rally citizens against the march of debt peonage.

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    1. orionATL

      dailykos ran a column on how “obama sold us out and gutted reform” ?

      how decent of them.

      too bad for its reputation that the dkos establishment were such cocksure “fools for obama” in 2008.

    2. baldski

      Does everybody know that Joe Biden voted for this bankruptcy act when he was Senator. The banks only gave him $140,000 to do it. Most of them are HQ’ed in Delaware! Thanks Joe!

      1. baldski

        Addendum: Harry Reid also voted for the bill, he only got $43,000 to vote for it. Our government is sick!

  1. RDP

    Ms. Smith: First time commenting, but I’ve been reading your blog for awhile because of my former work, and continuing interest, in foreclosure fraud. Also working my way through your book.

    Just wanted to note the 2005 Act made private student loans non-dischargeable in bankruptcy, whereas before then, the non-dischargeability provision applied only to federally-insured student loans. And that goes all the way back to the end of the Ford Administration, so that provision has been in place for a good, long while. Speaking of virtual debtors prisons, the banks have it good with federal student loans because the U.S. Dept. of Ed. is their collection agency, which can obtain a garnishment order on the borrower’s wages without ever setting foot in court. The DoE can also seize tax refunds and garnish a portion of a borrower’s monthly Social Security, too. Of course, no other type of debt has this kind of extraordinary protection.

    Actually, up until 1998, when yet another “bankruptcy reform” bill was before Congress, federally-insured student loans could have been discharged through a “loophole” in the Bankruptcy Code for debtors who had successfully completed the court-ordered payment plan in a Chapter 13 bankruptcy. In fact, before the bill reached Clinton’s desk, his administration convened a group of bankruptcy judges and lawyers, as well as law professors, to study the issues involving student loans and bankruptcy and make a report with recommendations. Well, their report came back with the recommendation to allow discharging student loans. The group explained its reasoning behind this, but can’t remember all of it off the top of my head right now. Anyway, Clinton ignored the recommendation and signed the bill, which closed the “loophole.”

    Given your interest in bank malfeasance and criminality, student loans would be a very ripe area of research and investigation, particularly in the late 80s-early 90s, when the banks (off the top of my head, I remember Citi played a leading role), a couple state guaranty agencies and private, fly-by-night colleges colluded in defrauding the federal student loan program so badly, they nearly brought down the entire program. I believe only a few low-level people involved on the college side ended up doing time, but what the players in the student loan field have gotten, and gotten away with, shows what kind of political power they wield.

    1. Walter Wit Man

      Great comment.

      Regarding the collusion, I would be interested to hear more about the instance you refer to, but the show College Inc. does a good job of describing how for-profit education companies pursue government loans and buying colleges just to get access to the loans with its accreditation.

      Also, an interesting take on a private company taking advantage of government education loans is the Lafayette Morehouse cult from the 70 and 80s, run by Victor Baranco. For some reason they were given special treatment and given an accreditation when they didn’t deserve it (hmmmmmmmm). Anyway, it’s an interesting example of for-profit huckster trying to use federally backed loans and government accreditation to make money (among other motives).

      Here’s an interesting description of what the state found when it finally investigated:

      “By the mid-1980s, California had tightened its rules for private post-secondary education. A team of educational inspectors were preparing for their first trip to the purple palace, completely unaware of what they would find.
      “It was an eye-opener,” says Darlene Laval, who chaired the state’s regulatory council for five years and now works for the Department of Education as a consultant. In 1986 she and two colleagues spent two memorable days at More. “Here were all these old limos and people sitting around in their underwear peeling potatoes,” says Laval, who describes the place as “really filthy,” to the point that “I would hesitate to drink their coffee.” A guy named Jim, Laval says, “came out of a building buckling his pants, followed by a woman, who was followed by a child.”

      One of the teachers also turned out to be a student. “She said she had gotten her degree in sensuality and was now working on her other degree, for which she would have to spend a week with Vic,” says Laval. “I said we need to talk to Vic, only to learn that he was ‘too busy.’ ” To maintain approved status, schools must send in a lengthy self-study. More’s version said in one place:
      “Equipment to take to class: a towel, a mirror, and all
      body parts.” This caused review team member Roz Elms,
      who earned her Ph.D. at U.C. Berkeley, to crack, “Doesn’t
      that discriminate against the handicapped?” When she
      learned of the “Weekend with Vic” course, Elms asked,
      “Is there a weekend with Vickie?”,62400,page=5

    2. bluntobj

      If you are in power, you can do anything you want to a guilty person.

      Guilt is the most effective prison for the mind.

      This idea keeps people trapped in housing, student, credit card, auto, etc. loans that are killing them. What is worse is that in most cases the guilt is earned.

      Becoming and staying debt free is the only way to be truly free, and in the renter society that the youngest generation is becoming they will never achieve that. It’s really no different than ending up as a serf under some feudal lord.

      What goes around truly comes around in history. Given the lack of value a college education has nowadays in most fields, I’d say that young people have a significant crisis ahead of them. As adults, though, it’s our responsibility to arm and educate them for the future. That future should not include debt.

  2. jake chase

    This is an important aspect of the real 1984 as it has finally arrived. Advertising and propaganda relentlessly insist to people that they can “have it all”, but the truth is that they end up with a mountain of (nondischargeable) debt, a pile of junk, a largely useless “education” and an upside down house. This is called ‘economic growth’ and the amazing thing is that most people continue believing in it. Since the political system has failed there seem to be no real solutions except individual ones. We are brainwashed into believing that the United States offers the ultimate refuge from social breakdown and governmental insanity, but it would not surprise me to see increasing numbers of young Americans voting with their feet. As to where they will be going I have no idea. Australia, perhaps?

    1. LeeAnne


      U.S. citizens who live in countries that aren’t served by U.S. banks may find themselves unable to bank at all, and implementation of the law in its current form could cause collateral damage to American businesses abroad, she said.

      “Americans either will not be allowed to enter into international partnerships or live and work overseas, and will be replaced by foreign nationals who do not have these limitations,” Serrato wrote. “The extensive reporting requirements of Fatca will be destructive to those who wish to do business internationally as well as to those Americans who are legitimately living and working overseas.”



      1. JerryDemim

        … OR they can renounce their citizenship and be free of the onerous requirements altogether.

        Its a tough sell for the nostalgic and patriotic, but simple self-interest rules the day when people are forced to choose between somewhere they can live well, save and get ahead, versus returning to their home country with sky-high unemployment, over priced education and health care, and a predatory crony-capitalist state intent on fleecing its citizens at every turn. Its going to be a no-brainer for any US citizen with a good job and a high quality of life living abroad.

      2. bluntobj

        Gotta prevent capital flight from the top 9% who might be thinking of trying to get away. Of course, this does not stop the 1%, who have the resources to easily sidestep such restrictions.

        These articles are just more propaganda to keep the middle classes from thinking about fleeing the country.

  3. M.InTheCity

    Well, I can confirm those high fees for bankruptcy. My parents needed to discharge their debts (the 2008 downturn ruined their business) and they had a solid, obvious case for discharge. But, of course, they had to pay the lawyer and the fees (about $2,500) first, which, being properly bankrupt, they couldn’t. Thankfully, I was able to send them the money without delay. But I somehow doubt most people have relatives they can depend on to help them out in that situation. It’s nuts. I was (and am) very unhappy with how the system is completely stacked against anyone with a proper claim to bankruptcy. Class warfare on a grand scale…

  4. santcugat

    Hey, at least in the US you can discharge many types of debt in bankruptcy.

    In Spain, there isn’t really the concept of consumer bankruptcy at all. The judge can set a minimum amount of salary that you are allowed to take home, but anything above that the creditors get for as long as you live. There are now some new some voluntary guidelines that allow banks to cancel your mortgage in exchange for the house, but nothing enforcable by a judge. (Although there have been a couple maverick judges making some novel arguments to force banks to cram down debts, but that has a ways to go.)

    And the creditors get to tack on their legal fees on the you debt, so you also get to pay for them to sue you.

  5. Chris

    It seems to be accepted that, when people make financial investments and take risks in corporations, things can go wrong and you might lose your investment. The company couldn’t return your capital, or your interest, it’s a dud, or perhaps it has fallen on hard times.

    Here, you lose your dough and you walk away, wiser.

    A lot of Americans have had hard times imposed on them, yet when corporations make financial investments (loans) and take risks in people, things are different. The corporation never walks away, and now you have a whole publicly funded system, including the privatised prison sector, clamoring to put debtors in jail.

    Very sad for you all (for me too) is what I am feeling.

  6. Enola Gay

    Collective bargaining for debtors would fix that right up, especially if debt strikes target the weakest banks first. You can tell how much it scares the looting class from what happened to Stephen Lerner when he brought it up. When we’ve had it, that’s the way to go.

    1. F. Beard

      Good idea!

      But why not target them all with a nationwide (worldwide?) debt repayment strike?

      The banks would soon be begging for a universal bailout ala Steve Keen!

      They (the banks) are just counterfeiters worthy of nothing but contempt.

  7. pws

    Has anyone looked at the increase in suicides related to bankruptcy since this bill went in?

    How about murder-suicides?

  8. stephen gowan

    Yes and agree with many comments. I stopped handling consumer bankruptcies in 2005 when the reforms were passed. Debtor’s prison is correct but worse as the whole family suffers. The Chapter 13 plan payment requirements are simply draconian at best. Allow a family of 4 about $500 a month in food expenditures. Just insane. Simply makes people lie to survive. And as to fees, the attorney fees are not enough to match the hell you catch from the trustees offices sucha as objections to plan confirmation etc. Things that clients dont usually even understand or care to know about. Then the fees the court system charges for filing are outlandish. This even in an era of electronic filing. It is way worse than debtors prison.
    Obama had filibuster proof Senate and the house. He could have fixed a lot of things. He wasted his capital on a health care bill so full of “grandfather clauses” and crap that it is meaningless.

    1. Frank Drebbin

      He’s passed NDAA after saying he had “problems” with it, next he’ll probably pass CISPA.

  9. Blurtman

    “But the campaign to stigmatize borrowers in trouble has been effective, and it will take a concerted effort to rally citizens against the march of debt peonage.”

    You can say the same about stigmatizing folks who walk away from an underwater mortgage, while RE development firms do this with impunity. And why don’t such companies also have to live under the sword of a FICO score?

    Two things that are being widely underestimated:

    1.) The internet affect – now folks have instantaneous access to information and disinformation moreso than ever before. So these crimes and abuses by the elite that have been going on forever are now extremely obvious to most folks.

    2.) The obvious two-tiered justice system exhibited by the lack of bankster prosecutions , gasoline on the fire of a declining middle class and recoveryless recovery, is creating a sustained loss of faith in government and the economic system. I wait for the day when resignation turns to anger turning to action.

    1. Jackson

      Well said – it is still surreal after the information publically available that Bankruptcy Judges will allow people to lose everything and more. Of course, if our public officials come from the very law firms that are doing the work of the rentiers, this is no surprise. One set of rules for them, another for us.

  10. Bridget

    I come from one of the strongest debtor protection states in the country, and am a firm believer in the clean slate philosophy of the 78 code. That being said, who is going to lend tens of thousands of dollars to eighteen year olds for the purpose of obtaining useless degrees without a guarantee that said eighteen year olds will ultimately be forced to repay the debt? Do away with non-dischargeability, do away with student loans. Which may not be such a bad thing in the scheme of things.

    1. Tim

      Absolutely it’s not a bad thing. The current state has 18 year olds under the logic that if somebody is loaning me money, I must be headed in the right direction, when reality is the only reason they are being handed the money is because they are taking all the risk.

      Not cool at all, of course most 18 year olds have at least one parent involved in the college selection process. What the heck are they thinking???

  11. Chapter

    Senator Hatch is a bought and twisted old loser. It’s a sign of the times, Banksters/Card swindlers get to write the legislation, not the alleged constituents. This makes it even easier to rush down to the Court(club)house and get a judgement. People are coarser, more vindictive and retributive. Debtors, muslims, immigrants, intellectuals.

  12. Chapter

    It must be said that Banks routinely violate Bankruptcy “protections” knowing they can get away with it. Hell, if you can buy felonies for cheap, there are no longer any rules at’all.

  13. knowbuddhau

    Thanks for the great info. I’m living this scenario right now.

    My bankruptcy attorney wants “$1500 in the door” before filing; I’ve got $400 to go. This has been going on for 2 years now. Coincidentally, I was tallying the number of times I thought I had the job that would get me out of this hellhole just before reading this article.

    When I got a part-time/on-call job as a janitor for the local community college, I excitedly called the office to tell them the good news. Then, a full-time colleague quit, allowing me the first full-time work since 2007 (when I had a living-wage job stolen by crony capitalists); but a more qualified candidate was hired. Then, I was recruited by a California-based property preservation company that promised “consistent” work; I’ve completed 6 work orders and made less than $200 since February.

    Right now, I’m waiting for an email containing the forms needed to get started for a guy who says he can “keep me so busy (mowing lawns) I won’t believe it.” But he’s gone radio silent in the last couple of days.

    On the plus side, it could be said that I’m practicing strategic impoverishment: they can’t take what I ain’t got. But that’s cold comfort for not being able to contribute meaningfully to my community.

    I feel like a freakin zombie. I may look like a normal middle-aged white guy from a distance, but no matter how small the latest unexpected cost, I got nothing. If it wasn’t for family, I’d be on the streets.

    1. knowbuddhau

      “NATO has admitted it mistakenly killed an Afghan mother and five of her children in an air strike last week. The air strike occurred in Helmand province.”

    2. knowbuddhau

      Above is my original comment. The other two (@ 10:33 and 10:40) are not mine. IDK how someone else is posting with my name.


      Laughing Stock:

      Back in February, I found a Craigslist ad for a company that “preserves” bank-owned houses. I was told that “there’s profit to be made” in just the run-of-the-mill work orders (for lawn-mowing and cleaning and such), but that “the real profit” would be in bids to do repairs to the house, change locks, etc.

      I’m mentioning this to add details to the manners in which people can be held in debtfare.

      Even if I could get a bond (required to make structural changes to a building), I’m not interested in changing locks on houses that could be in the process of being stolen by fraudclosure. But I will keep the lawns mowed in order to control vermin.

      Although one clause of the contract states that I’m responsible for following all the laws of my state etc., the company doesn’t insist on the bond.

      A big point has been made about avoiding the cost of a legit locksmith. If I had accepted the several lock-change work orders I’ve been sent, it would’ve only amounted to maybe $50 over the course of a month.

      The companies “preserving” the properties are working for the same big banks that effed us into these hellholes to begin with. Inducing desperate people to do illegal work, in order to help banksters steal more houses, ain’t my idea of helping, but I’m sure it’s profitable for someone.

  14. ella

    The Bankruptcy reform provided special privileges to a certain class of creditors. Think Wall Street.

    “Secions 555 (securities contracts), 556 (commodity or forward contracts), 559 (repurchase agreements) and 560 (swap agreements) of the 2005 Bankruptcy Code Amendment, that essentially says that if a party to a security transaction or swap files for bankruptcy, the non-affiliate holder of those securities can march right to the front of the line of all creditors (including secured creditors) and they can “foreclose” on whatever financial properties of the estate that are still liquid as collateral damages. Can you believe this?”

    This means that the Trustee can not reclaim those assets and use them to pay the other creditors to the estate. Contrary to prior Bankruptcy law.

  15. knowbuddhau

    If you’re needy, you must be in need of correction. The poor are likely to harbor criminal tendencies, applicants for safety net programs must be subjected to finger-printing and computerized searches for outstanding warrants. Drug testing as a condition for all government benefits, especially white suburbanites who partake of cannabis and other narcotics. Foreclosed-upon suburbanites, laid-off tech workers have only themselves to blame, I’m not a zombie I will mow lawns!

  16. Susan the other

    And the banks cannot even understand their own accounting. That’s just another good reason to turn them into utilities. It was pointed out that if all the banks forgave each other’s debts they would all have good balance sheets. Showing how pointless the whole thing is. But they refused to consider this option. I think it is because they are both crooked and confused and they use debt “assets” to stay alive via overnight repos, and slimy fees. They are totally insolvent. So there should be universal debt forgiveness. Profound debt forgiveness that starts with the people and works up to the banks only after people have been cleared of their debt or given a monetary reward for living without debt. The banks should not receive a dime until the people have been restored.

    1. GE Foreclosures

      The class war means a small group of people live very comfortably in gated communities, with private schools, clubs, organizations, foundations, shelters, access, priveledges and control. They are closely aligned and their ranks includes the Banksters, Corporate Lawyers, the War Profiteers and the bought, sold and owned legislature. To the machine, resistance is useless.

      1. econ

        Was it not Walter Cronkite on his CBS News daily telecast conclude with…That’s the way it is.
        I am not confident that the way forward will be any more enlightening than…that’s the way it is! Chairman Mao said only an action plan gets us beyond talking.


    I worked to debtor’s bankruptcy firms for years. One aspect which is little known is the effect of the “means test” on employment. It works like this. When a two income household makes too much money to file a Chapter 7, one spouse simply quits his or her job so the couple can quit for a Chapter 7. In single income households I’ve seen the wage earner as for his hours to be cut so they can qualify for Chapter 7.

    Where client’s can’t or object to bankruptcy because of the onerous provisions of the his “reform” I have suggested forwarding all billing statements to a UPS post office box and letting the contract on the box expire withhout a forwarding order. To go to a new cell phone. Most of these clients were planning on moving because a foreclosure.

    You’d be surprised how often this works. There are so many millions of unemployed or underemployed debtors they simply get lost in the shuffle.

  18. rhcaldwell

    here, here! well said, and one more loss to mourn. neoliberal state, indeed…

  19. Jim A.

    It always seemed to me that being able to figure out who would be willing and able to repay them is the core competency of lenders. The revision to the bankruptcy law were a ginormous gift to them for doing their job badly. Go, corporate welfare.

  20. Mr. Bubbles

    It seems to me the answer to all this is a return to the debtor’s prisons of the past that we once had in the U.S. However, this time the prisons will be for profit. More and more large corporations are moving more and more of there production into the prison system. It is actually economically viable to employ Americans over people in China and India if you can pay them .50 an hour as in the prisons. So debtors can work off their debts in debtors prisons. This will greatly reduce the employment problem in the U.S. and fatten the profits of the multinational corporations. A win-win situations. The United States could become a giant prison gulag.

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