Opportunistic Informal Bankruptcy: How BAPCPA May Fail to Make Wealthy Debtors Pay Up

Bankruptcy is not the most common recourse for individuals deeply in debt; it is merely the most well known. Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) in part to close state law exemption loopholes that allowed wealthy individuals, or “opportunistic debtors,” to declare bankruptcy and emerge with their debts discharged and their assets intact. Yet BAPCPA does not reach the more popular practice of informal bankruptcy, through which insolvent debtors avoid paying off their debts despite not filing for bankruptcy because creditors find it too costly to collect under state law. Although traditionally only poorer debtors used informal bankruptcy, BAPCPA will encourage opportunistic debtors to adopt this tactic as well, because the exemption loopholes the Act targets remain open under state law. Consequently, BAPCPA will fail to curb bankruptcy abuse. The Act might drive opportunistic debtors away from formal bankruptcy, but it cannot make them pay their debts. This Note proposes that courts close this informal bankruptcy loophole by relaxing the judicially created restrictions on involuntary bankruptcy, making it easier for creditors to force opportunistic debtors into formal bankruptcy.