Pro-Creditor Bankruptcy Reform Fails – Punish the Credit Pushers, Professor Proposes

Pro-creditor bankruptcy reform has failed and lenders who push easy credit on weak borrowers should be punished, usury rates restored, according to consumer finance commentators.

“Picking the biggest policy mistake of the past few years is no easy task, … but the Bankruptcy Act of 2005 is a leading contender,” according to Dan Geldon of the TPM Cafe. “It isn’t just activist types who think so,” he says in his recent post.

BAPCPA “should be renamed the Drive More People Into Bankruptcy Act of 2005,” according to Liz Pulliam Weston in her recent MSN Money article. She summarizes the harmful effects of bankruptcy reform: record credit card debt, spiking default rates, increasing bankruptcy filings, falling home prices and soaring foreclosures.

Bankruptcy law changed in a pro-creditor direction and credit card issuers responded by extending more credit, writes Prof. Michelle White for the National Bureau of Economic Research. “But more credit card loans combined with reduced access to debt relief in bankruptcy seems certain to result in severe financial distress for at least some debtors,” White says.

Pulliam discusses Prof. White’s suggested solution: discourage consumers who borrow too much, punish creditors who push credit on the weakest borrowers, credit, return to old-school usury laws, which limit how much interest lenders can charge, and punish creditors in bankruptcy by discharging loans given to overextended individuals.