The essential feature of the Bankruptcy Reform Bill that passed Congress and was signed by President Bush in 2005 is that it limits the bankruptcy options of households above the median income in each state. Under the previously existing structure of bankruptcy law, individuals who entered bankruptcy had two basic options, Chapter Seven and Chapter Thirteen bankruptcy. Under Chapter Seven bankruptcy, overhanging debt was (and for those remaining eligible, still is) forgiven, the immediate financial slate being wiped clean. Under Chapter Thirteen bankruptcy, an arrangement must be scheduled for (at least) partial repayment of the overhanging debt.
It should be noted that this measure is in fact a partial reversal of previous reforms that ameliorated the punitive effect of bankruptcy law. In the more distant past, bankruptcy law was exceedingly severe. In the English legal tradition, inherited by the United States, bankruptcy was treated under the Statute of Frauds, dating to 1677. The default assumption was that the bankrupt person had borrowed money without intention to pay it back. Hence the institution of debtors' prison, which persisted well into the 19th century.
The banking and credit card industries had been pushing for this bill since the mid-1990s, and a version passed Congress only to be vetoed by President Clinton. Though supported from the outset by President Bush, no bill reached his desk during his first term, but he made it a second-term priority, and in the spring of 2005 it reached his desk and he signed it.
The bill as passed benefits the financial service industry, and particularly banks that issue large numbers of credit cards. It harms middle-income consumers, at least those who are above the median income in their state, who in the event of a household financial crisis will no longer have the option of filing for Chapter Seven bankruptcy and escaping from their debt overhang. The direc...