October 17, 2008 marked the third anniversary of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). This sweeping bankruptcy reform was designed to eliminate bankruptcy as an option for many would-be filers. While there is no doubt BAPCPA impacted bankruptcy filings both nationally and in West Virginia, recent trends suggest filings are on the rise and could reach pre-BAPCPA levels in the foreseeable future.

The 2005 Boom

The most significant impact of BAPCPA was seen in the weeks and months leading up to it becoming a law as anyone remotely considering bankruptcy rushed to file prior to October 17, 2005 out of fear they would not be able to file thereafter. Nationally, more than two million bankruptcy cases were filed in 2005 representing a 31% increase over the previous year. In West Virginia, filings in 2005 reached 17,750 cases which equates to an increase of 53% over 2004. The prelude to BAPCPA brought about all-time record bankruptcy filings both nationally and in West Virginia.

The Lull

Given the 2005 boom, 2006 was a very slow year for bankruptcies. National filings totaled 617,660 which equaled only 30% of the 2005 caseload. The decrease in West Virginia was even more dramatic as filings plummeted to 3033 cases, or roughly 18% of 2005 filings. Many pointed to the 2006 figures as evidence that BAPCPA served its purpose and believed this would be the norm in the post-BAPCPA era. This has not proven to be the case.

The Resurgence

In 2007, total filings rose to over 850,000 nationally, a 38% increase as compared to 2006. The 38% increase experienced nationally in 2007 was higher than the 31% increase experienced between 2004 and 2005 during the bankruptcy boom. In West Virginia, total filings in 2007 reached 4,492 resulting in a 48% increase over 2006 figures. While an increase in 2007 was expected given the drought of filings in 2006, the rate at which bankruptcies increased may have surprised many.

The Climb Continues

Bankruptcy filings through the third quarter of 2008 have continued an upward climb. For the first three quarters of 2008, national bankruptcy filings totaled approximately 801,000 which was a 29% increase as compared to the first three quarters of 2007. Assuming this trend continues, national filings will exceed 1,100,000 cases this year.

West Virginia has also experienced double digit bankruptcy growth through September 30, 2008, although at a slower pace than the national rate. In the first three quarters of 2008, West Virginians filed 3,909 bankruptcy cases representing a 19% increase over the first three quarters of 2007. West Virginia is on pace for approximately 5,300 bankruptcy filings this year.

The Outlook

Given the current state of the economy, the trend of increased bankruptcy filings is likely to continue beyond 2008. Typically, there is a six to nine month lag between the time a debtor falls on hard economic times and the actual filing of a bankruptcy petition. With the current economic climate of increased unemployment, high energy prices, a depressed housing market and a declining stock market, bankruptcies will likely continue to rise well into 2009 and possibly beyond.

If bankruptcy filings continue their upward trend, we may return to pre-BAPCPA levels in the foreseeable future. In the three-year period leading up to 2005, average filings were approximately 1,600,000 nationally and 11,000 in West Virginia. While we are still well-short of those benchmarks, filings could return to pre-BAPCPA levels within three to five years if the economy doesn't improve dramatically. If 1,100,000 cases are filed nationally this year and we continue to experience 20% or more growth in filings each year, we would reach pre-BAPCPA levels in about three years. In West Virginia, if filings end up being around 5,300 this year and we experience 20% growth each year, it will take approximately four to five years to reach pre-BAPCPA levels.

Conclusion

As we analyze the effectiveness of BAPCPA on its third anniversary, it appears to have produced mixed results. On the one hand, there is no doubt BAPCPA caused a dramatic drop in bankruptcy filings which remain well-short of levels experienced before BAPCPA became a law. On the other hand, trends over the last 21 months suggest bankruptcies are making a come-back and it is quite possible we could reach pre-BAPCPA levels in three to five years, especially given the current status of the economy. Thus, while BAPCPA slowed the bankruptcy train down, it didn't bring it to a screeching halt.

*As seen in the October 17th issue of The State Journal. 

*This article is based upon statistical information made available by the American Bankruptcy Institute and the Offices of the Clerks of the United States Bankruptcy Courts for the Northern and Southern Districts of West Virginia.