Does Mortgage Crisis Have its Roots in Bankruptcy Reform?

My colleague, Georgia bankruptcy attorney Scott Riddle recently blogged about an interesting relationship between the BAPCPA laws and the recent problems in the mortgage industry.  Under prior law, Chapter 7 was much more widely available to homeowning families in financial distress.  A Chapter 7 filing would allow such families to get rid of credit card and other consumer debt while reaffirming their mortgage payments.

The Business Week article that Scott references in his blog post quotes a Wharton School professor who notes that a law lobbied for and designed to benefit the financial industry may actually be hurting lenders.   With consumer debt much harder to eliminate, many families are giving up their homes, leaving lenders with increased inventory.

I see this phenomena in my own practice.  Families earning $80,000 to $100,000 end up in Chapter 13 where they have to pay back 70%, 80% or more of unsecured debt based on the bizarre calculations of means testing.   After living on bread and water for a few months, many of these families come to the conclusion that they need to give up homes, cars or furniture.

Bankruptcy “reform” has only served to restrict the safety valve function of bankruptcy - the current law is so harsh that many families decide that it is not worth the fight.

Scott Riddle’s blog post can be referenced here and the Business Week article he discusses can be read by clicking on this link.