A Bankruptcy Lawyer’s Blog

The Economics of Filing Bankruptcy 101

In one of the most unsurprising news items I’ve come across in some time, the number of people filing bankruptcy has nearly reached pre-BAPCPA levels, despite the tougher eligibility requirements and higher costs of filing that BAPCPA imposed. One of the most fundamental principles of economics, the law of supply and demand, dictates that the number of bankruptcies filed should go down as the cost to file goes up. So what gives?

But before getting into the answer, a little background. For those of you who don’t know, BAPCPA stands for the Bankruptcy Abuse Prevention and Consumer Protection Act. To quite a few bankruptcy practitioners it’s known as the Bankruptcy Act Reform Fiasco (I’ll leave it to you to figure out the acronym). It imposed the notorious means test and generally made it more expensive to file bankruptcy. How these changes protect consumers is beyond me. Perhaps Congress just likes giving laws Orwellian names.

Let’s get back to the topic of why the number of bankruptcies filed hasn’t gone down even though the cost of filing has gone up. I believe the explanation lies in an economics concept called elasticity of demand. Put simply, elasticity is defined as the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). It’s important to keep in mind that elasticity varies tremendously depending on what economic good is being analyzed.

For example, the elasticity of a commodity like corn is high. If the price goes up, people consume significantly less of it. They can switch to eating other types of food easily. At the other extreme is a product like insulin. If someone with diabetes is going to die quickly without insulin, even if its price goes up a lot a diabetic is still going to buy it.

Since the number of bankruptcies hasn’t gone down significantly even though its cost has gone up, it appears likely that bankruptcies, like insulin, are a low elasticity of demand item. This conclusion is not surprising to me as a bankruptcy attorney since no one I’ve ever met files bankruptcy unless they have no other option. Apparently this did not occur to Congress when they enacted the Bankruptcy Abuse Prevention law. At the end of the day, the result of BAPCPA seems to be that it imposes additional costs (i.e. it punishes) on people at a time when they can least afford it. With Consumer Protection Acts like that, what consumer needs enemies?

John Fox is a bankruptcy attorney and the founder of The Fox Law Office. The Fox Law Office is located in San Jose, California, and focuses on representing consumers facing bankruptcy because of unmanageable real estate debt.