Released: June 12, 2006

Bankruptcy filings up despite reforms

Source: CNN Money

A new U.S. law to deter American consumers from seeking bankruptcy protection made filings plunge to a 20-year low in the first quarter of 2006, but a rapid rise in new cases since then raises questions about whether the law is working as expected.

The 2005 bankruptcy reform law was pushed through Congress by banks and credit card companies that sought to prevent abuse by individuals trying to wipe their financial slates clean from runaway debt.

By making it more difficult to file for personal bankruptcy, the companies reasoned that consumers would be more likely to negotiate a repayment plan.

“I think the law so far is working as it was intended,” said James Chessen, chief economist for the Washington-based American Bankers Association trade group. “Some of the abuses have been wrung out of the system.”

But credit card companies and banks are keeping an eye on the recent increase in filings.

The law took effect Oct. 17, 2005, prompting a surge of 619,322 personal bankruptcy filings for that month as debt-laden consumers rushed to court.

New cases plunged to 13,758 in November, then rose to 21,636 in December, 27,235 in January, 35,352 in February and 49,977 in March, according to the Administrative Office of the U.S. Courts.

That compares to the monthly average of 130,183 new cases in 2004.

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