2005 Bankruptcy Law Linked to Causes of U.S. Mortgage Meltdown

12 Jan 2005 Bankruptcy Law Linked to Causes of U.S. Mortgage Meltdown

The Kansas City Star reported today that three researchers at the Federal Reserve Bank of New York, in a study, assert that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, known as BAPCPA, is the leading cause of the mortgage meltdown. They claim the legislation shifted the risk from credit card lenders to mortgage lenders.

Prior to BAPCPA, households could erase their credit card debt much easier than they can now by filing a Chapter 7 bankruptcy. The bankruptcy filing freed up income that homeowners could use to make mortgage payments. With the passage of BAPCPA, debtors are required to pass a means test before they can file a Chapter 7. If they don’t pass the means test, they must file a Chapter 13 bankruptcy and pay back some of their debt.

One of the three researchers, Donald Morgan, stated during a phone interview that he was “99 percent confident” that BAPCPA was a major reason for the foreclosure crisis and the falling house prices in the U.S. He went on to say that before the law was passed, consumers who over extended themselves could file bankruptcy to free up income to pay the mortgage.

Under the current law, if they are unable to file Chapter 7, they are denied that escape route and are forced to continue paying unsecured creditors making it much more difficult to continue paying the mortgage. Mr. Morgan and his colleagues conclusions echo earlier findings that BAPCPA’s tougher requirements appear to have increased the number of people defaulting on their mortgages or walking away from their homes rather than seeking bankruptcy protection.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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