People filing for Chapter 7 and Chapter 13 consumer bankruptcy protection are facing as much as a 55 percent cost increase as one result of the 2005 comprehensive bankruptcy reforms, according to a new study.

Lois Lupica

The study, published in the American Bankruptcy Institute Law Review, found that as a direct result of these increased costs, unsecured creditors are being paid a smaller percentage on the dollar today than prior to the 2005 reform.

The study, authored by New York bankruptcy attorney Lois R. Lupica of Thompson & Knight LLP and funded by the American Bankruptcy Institute and the National Conference of Bankruptcy Judges, reveals that consumer bankruptcy is a "far more complicated process than it was before the 2005 amendments" based on an increased number of conditions and calculations for filers in addition to a corresponding rise in expenses.

"The government's stated goal in passing bankruptcy reform was to eliminate abuse of the system and create a set of higher eligibility standards for consumers, but this is the first time that the financial impact of those standards has been quantified," said Lupica, who also serves as a Maine Law Foundation Professor of Law at the University of Maine School of Law in Portland.

The study examined data collected from consumer bankruptcy cases in judicial districts located in Florida, Illinois, Georgia, Maine, Utah, and West Virginia. The costs to consumers were defined as debtor's attorney fees and expenses, trustee fees and expenses, filing fees, credit counseling and debtor education fees, and any other professional fees.

For the sample of Chapter 13 cases, the study found that the median cost for consumers was $2,930 in 2003 and 2004, with an increase to $4,077 in 2007 and 2008. For Chapter 7 cases in the same periods, the costs increased from $900 to $1,399.

"Attorney fees are just part of the required administrative expenses that may have contributed to the overall decline of consumer bankruptcies, even in the face of the public's increased debt load, foreclosures, and loan defaults," Lupica said.

While the overall number of consumer bankruptcy filings has declined since passage of the 2005 reforms, the most recently available data reported by the ABI shows that the 149,268 consumer bankruptcies filed in March 2010 represented the highest monthly total of consumer filings since the reforms were enacted. The March filing total represented a 34 percent increase from the February filing total of 111,693 and a 23 percent increase from the March 2009 total of 121,413.

"Greater up-front costs may have hindered some consumers from filing bankruptcy, but there may be other factors at play," Lupica said. "There was a large volume of negative publicity in the aftermath of the 2005 amendments, as well as heightened efforts by aggressive debt collection and consolidation firms."

The publication of the study marks completion of the first phase of a two-part national survey to analyze how the consumer bankruptcy system has changed in the past five years. The full study is scheduled to be published in late 2011.