The Housing Chronicles Blog: Tougher bankruptcy laws leading to more foreclosures?

Tuesday, September 23, 2008

Tougher bankruptcy laws leading to more foreclosures?

Remember the new bankruptcy rules enacted in 2005 that made it tougher to file for Chapter 7 and walk away from creditors? Now it seems that the law, for which credit card lenders lobbied heavily, may be increasing foreclosures and hurting mortgage lenders. From a BusinessWeek story:

The latest lesson for lenders from the housing crisis: Be careful what you wish for. Banks and other financial outfits spent eight years and $40 million lobbying for sweeping new bankruptcy rules that would limit their losses from deadbeat debtors. But it turns out those changes, enacted in 2005, are forcing more troubled borrowers to walk away from their homes—even those who didn't take on risky mortgages in the first place...

Before the new rules kicked in, many consumers could find debt relief—and keep their homes—by filing for bankruptcy protection. Now the process is much more onerous and expensive and the benefits more limited, making foreclosure seem appealing by comparison. A July paper by David Bernstein, a researcher at the U.S. Treasury, found that 800,000 fewer homeowners have filed for bankruptcy since the rules kicked in. A quarter of those people, says the report, have likely had to give up their homes as a result—boosting foreclosures nationwide at least 4%...

Previously, anybody could file for Chapter 7, the quick and cheap proceedings that liquidate financial assets but not the home to cover debts and dismiss unpaid bills. Now only low-income borrowers qualify, and Chapter 7 doesn't stave off foreclosure. ..

As a result, many struggling borrowers have no other option but Chapter 13, which requires that people follow a court-mandated repayment plan for all their debts, including medical, credit-card, and other bills typically discharged under Chapter 7. Going the Chapter 13 route can halt a foreclosure already in process. But that's often only a temporary salve, since other debts aren't eliminated, and banks can resume foreclosure proceedings as soon as the payments begin to slip anew.

1 comment:

Alessandro Machi said...

There is a lot of stuff going on to try and keep everybody's attention away from old credit interest debt that keeps compounding. Anther issue not being brought up is lack of income tax deductions for renters.

Homeowners AND those who pay rent should BOTH be allowed a FULL DEDUCTION off of their income tax bill.

Instead we are told that it is higher oil prices and the sub prime that are causing economic problems.

That is a lie. You can't blame people for wanting to live in a home when it only costs a few hundred dollars more than renting. However, if a renter gets a full rental deduction for their income tax for living in an apartment or rental facility, then the incentive to try and move into a home is balanced out, and we don't get dishonest applications being submitted.