G. Ray Warner



In 2005, following years of intensive lobbying by the consumer credit industry, the focus of the consumer bankruptcy law was changed from the liberal debtor-focused "fresh start" approach embodied in the 1978 Bankruptcy Code to a creditor-focused "can pay/must pay" approach. Although the shift to a can pay/must pay system started years earlier to address perceived abuses, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") completed that shift by engrafting onto the bankruptcy law a fairly strict and largely objective test for determining a debtor's ability to repay debt and by setting forth channeling rules designed to force debtors with a perceived ability to repay some debt into a lengthy repayment plan.

The focus of the debate about that change has been on the debtor. Proponents of the change have phrased the reforms in moralist terms. They tend to set forth a narrative of widespread moral failure among those debtors using the bankruptcy system, and they use morally charged terms like "substantial abuse," rather than more neutral terms like "eligibility" to describe the debtors determined to have an ability to repay. Opponents of the change have similarly focused on the debtor, arguing that the indebtedness causing resort to the bankruptcy system does not equate to moral failings by debtors and focusing on the debtors' need for relief from burdensome indebtedness.

Largely missing from the debate is consideration of the possible macroeconomic effects of the 2005 BAPCPA changes to the bankruptcy law. The purpose of this brief essay is to explore the role that the consumer bankruptcy system plays in economic recovery after periods of economic recession like the current "Great Recession." My thesis is that consumer bankruptcy policy plays an important role in economic recovery and that the shift to a can pay/must pay system will both dampen and delay recovery from economic recessions.



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