The federal Bankruptcy Code was enacted in 1979 following its passage in 1978. This legislation was perhaps the most beneficial piece of legislation ever enacted by Congress, at least in terms of consumer rights. It provided numerous advantages to debtors seeking relief from debts they could no longer pay and was a readily accessible legal remedy for consumers with low to moderate incomes. The 1978 Code was a tremendous boon for individuals experiencing financial difficulties, and the process had not yet been co-opted by the major banks. But after enduring a decade of double-digit inflation during the 1970s, consumers needed a vacation.
With the Bankruptcy Amendments and Federal Judgeship Act of 1984, however, banks attempted for the first time to influence the bankruptcy code in their favor. Thankfully, they did not get everything they wanted, and this act did not significantly alter how the system functions for the overwhelming majority of individuals. With the 1984 law, creditors were able to implement some of their ideas, making it marginally more difficult to file for bankruptcy and making the process more detrimental to debtors. However, no substantial changes were made.
The Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act, enacted in 1986, made more substantive changes to the bankruptcy code. However, these did not have a significant impact on consumers, bankruptcy costs, or bankruptcy accessibility. Congress appointed more bankruptcy judges in various jurisdictions, established the trustee system that courts continue to use, and established Chapter 12 bankruptcy for farmers.
With the passage of the Bankruptcy Reform Act in 1994, another amendment to the bankruptcy code was made. This legislation was a muddled bag for consumers, with some provisions assisting them and others favoring creditors. This act also reversed a number of Supreme Court decisions that were primarily favorable to large financial institutions, particularly in terms of mortgage debt. The law of 1994 overturned these decisions to facilitate mortgage debt modification.
The last significant modification to the bankruptcy code was the much-discussed Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The purpose of this act was neither to prevent abuse nor to defend consumers. Instead, it was written primarily by lobbyists who did not comprehend the bankruptcy code in an effort to impose greater control on federal bankruptcy judges and make filing for Chapter 7 or Chapter 13 much more difficult and costly. This act's only true advantage is that it was so poorly written that bankruptcy judges will be interpreting its implications for years to come. Many of the worst provisions may be disregarded in the end.
Since the late 1970s, the pendulum has swung from protecting consumers with extensive bankruptcy protections to making it harder for them to pursue this legal remedy. In the interim, federal monetary policy and related legislation have greatly expanded Americans' access to simple credit. Instead of granting relief in bankruptcy court, banks have been working for years to turn people into debt captives in the event of a financial crisis. The banks believed they had gotten what they wanted with the 2005 act, but it may turn out that the poor quality of the new law leaves in place many of the most potent provisions and protections from the earlier laws.
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