The Constitution granted Congress the power to establish “uniform Laws on the subject of Bankruptcies” to facilitate the free flow of interstate commerce. However, bankruptcy law has evolved from facilitating debt collection to facilitating debt evasion. Prerequisites to filing are few, but the relief available to consumers is extraordinary. A discharge, which releases a debtor from the obligation to repay debts, offers the debtor a “fresh start.” A consumer can even file bankruptcy more than once.
A filer is also able to choose the most attractive filing option. Chapter 7 allows consumers to walk away from their debts within a few months. There is no requirement that future income be committed to paying creditors, only that the debtor offer up assets not protected under law. A debtor choosing the alternative option, Chapter 13, is put on a plan to pay off as much debt as possible over a period of up to five years. In contrast to Chapter 7, this chapter allows debtors to shelter assets from creditors.
One would expect that when economic times are bad, filings would rise; when economic times are good, filings would fall. But over the last two economic expansions, four to five years into recovery, filings have increased dramatically—ultimately to record levels. This phenomenon suggests that bankruptcy now has little to do with bailing people out when the economy goes sour; it has almost everything to do with letting people out of their debts during good economic times.