TowerGroup Sees Unintended Bankruptcy Reform Results.

Needham, MA -- Needham, MA-An analyst at TowerGroup here says that while more time is needed to assess the impact of the Bankruptcy Reform Act of 2005, the early indications are that "initial optimism may need to be tempered in the face of growing criticism."

The 2005 act was designed to close loopholes that invited abuse of the bankruptcy system, costing creditors millions of dollars in unnecessary credit losses. By shifting more consumers into Chapter 13 instead of Chapter 7 bankruptcy, it has been assumed that creditors such as mortgage lenders would be able to recover more funds.

While the number of bankruptcy filings has indeed fallen since the passage of the bill, TowerGroup research finds that passage of the reforms may be having unintended consequences including higher costs to administer the bankruptcy process, longer timeframes to resolve bankruptcy proceedings and higher costs for consumers.

The U.S. Courts reported that in April of last year, about six months after enactment of the legislation, bankruptcy filings were 70% below the level from a year earlier.

But while lenders are glad that filings have decreased, the TowerGroup says it is too early to declare the reforms a success. The consulting organization believes it will take at least another 12 months to fully assess the impact of the changes in bankruptcy law.

But while bankruptcies are down, bankruptcy filings - like mortgage defaults - appear to be on the rise, according to TowerGroup.

The new law, officially the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, is meeting opposition from consumer bankruptcy attorneys, who have recently met with members of Congress to vent their frustrations.