Despite nearly record levels of both insolvency and bankruptcy filings, many people who are in serious financial distress are unable to get bankruptcy protection.

According to a recent report in USA TODAY, many debt-laden Americans are finding the benefits of bankruptcy denied to them by the restrictions passed in 2005 -- or they simply can't afford to file. Here's why:

  • The increased cost and complexity of filing for bankruptcy created by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) have meant many debtors are unable to afford to fight for certain bankruptcy protections that require a hearing, or can't afford to file at all.
  • The real estate crisis prevents troubled homeowners from selling unaffordable homes, but debt secured by a principal residence is not dischargeable in Chapter 7 bankruptcy and, until this month, filing for Chapter 13 disqualified them from the federal HAMP program.
  • The economic downturn has made it hopeless for many to find jobs with wages high enough to pay back educational debt, but student loans are virtually non-dischargeable in bankruptcy.

As a result, many financially strapped Americans are having to forego bankruptcy's promise of a fresh financial start. But postponing filing for bankruptcy is like delaying going to the doctor, according to law professor Robert Lawless of the University of Illinois -- you'll just end up in deeper and deeper financial trouble.

Signs of Acute Insolvency All Around Us

Credit card and student loan defaults have risen significantly. Credit card defaults grew by 18% from March to April of 2010. Student lender Sallie Mae is now projecting that 40% of subprime student loan borrowers -- 360,000 to 540,000 people -- will default. Foreclosures, especially in California, are at historic rates and still on the rise.

At the same time, bankruptcy filings, while also at record levels, are leveling off. "[T]he filing rate doesn't even begin to count the depth of the financial pain," says University of Iowa law professor Katherine Porter.

"My future is gone before I have a chance to make one." said 2007 Louisiana State University graduate Carmen Gardiner in the USA TODAY story. "But if I could discharge this using bankruptcy, it would be better than winning the lottery."

The only chance for student loans to be discharged in bankruptcy is for the borrower to prove paying their loans off will result in "undue hardship," a tough legal standard. It also requires costly litigation, which most debtors can't.

Leaving People Helplessly Mired in Debt Hurts All of Us

"I'm completely sour about the whole idea of going to college," said Gardiner.

"[B]eing stuck in a low-wage job hurts everyone and drags down the economy," says Porter. "It is not surprising that the bankruptcy code is not a fit for the problems of today. The 2005 amendment was a move in the wrong direction, and I think it's time to think about redesigning bankruptcy."

Related Resource:

"Only a fraction of those in need file for bankruptcy" (USA TODAY, June 9, 2010)