Unintended Consequences: Did Bankruptcy Changes Crash the Economy?
A half-dozen years ago, bankers were testifying to Congress about the need for a sweeping reform of bankruptcy law to make it more difficult for Americans to file for personal bankruptcy. They got what they wanted in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act.
A team of economists now argues that the restrictive bankruptcy reforms helped lead the nation into its current deep recession by pushing the numbers of mortgage defaults and delinquencies up by almost 200,000 annually.
Among the problems with the tightened bankruptcy laws is the increased costs in filing for bankruptcy and a reduction in the debts that are discharged. The unintended consequence: homeowners are often unable to get bankruptcy protection and are instead losing their houses.
Types of Bankruptcy
In a Chapter 7 liquidation bankruptcy, most unsecured debts are discharged. The person filing liquidates assets (less their available exemptions) to repay their unsecured debt.
In a Chapter 13 reorganization bankruptcy, debtors agree to repay some of their debt over a three- to five-year period.
Economists Wenli Li of the Federal Reserve Bank of Philadelphia, Michelle J. White of the University of California at San Diego and Ning Zhu of the Graduate School of Management at the University of California, Davis say both kinds of bankruptcy can potentially help homeowners save their homes.
Filing for Chapter 7 bankruptcy can stop a foreclosure proceeding for a period of time, giving a person time to catch up on their payments. Chapter 13 has the same delaying effect on the foreclosure process. If a homeowner is far behind on mortgage payments, Chapter 13 could allow a debtor catch up on missed payments with a court-approved plan.
Increased Costs and Barriers
The 2005 bankruptcy changes added new costs to bankruptcy: filing fees have risen more than 50 percent, according to a government study. There are also fees for credit counseling and debt management and the costs of mandated documentation of income and assets.
The 2005 reform also introduced a means test, forcing some homeowners with high incomes to file under Chapter 13 rather than Chapter 7. That forces the debtors to repay some of their unsecured debt from their future income; again harming them financially and hampering their ability to pay their mortgages in a timely fashion.
The new bankruptcy law also imposes a cap of $75,000 (basic), $100,000 (family) and $175,000 (elderly, low income or disabled) on the homestead exemption, making bankruptcy "much less attractive after the reform," wrote economists Li, White and Zhu.
The three economists concluded that before 2005, homeowners in dire financial straits benefited from filing bankruptcy whether they wanted to keep their homes or not. They also say that the economy and homeowners would benefit by rolling back bankruptcy laws to their pre-2005 state by lowering the number of mortgage defaults and underwater loan walkaways.
If You Face Foreclosure
If you're a homeowner facing foreclosure, talk to a California bankruptcy attorney who can help you understand all of your legal options and help you choose the course of action that will protect you and your family best.
Questions and Answers
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Bankruptcy lawyers Richard Chang and Steven Diamond have worked together since 1995. At Chang & Diamond, APC, in San Diego & Riverside County, California, we work to dispel the stigma of bankruptcy. We provide all-inclusive client services in the following areas: Chapter 7 bankruptcy; Chapter 13 bankruptcy; recovery from bankruptcy; asset protection and exemptions; foreclosure, repossession, and harassment; and bankruptcy during divorce. Discover how we can help you find financial security.
Bankruptcy lawyers Richard Chang and Steven Diamond have worked together since 1995. At Chang & Diamond, APC, in San Diego & Riverside County, California, we work to dispel the stigma of bankruptcy. We provide all-inclusive client services in the following areas: Chapter 7 bankruptcy; Chapter 13 bankruptcy; recovery from bankruptcy; asset protection and exemptions; foreclosure, repossession, and harassment; and bankruptcy during divorce. Discover how we can help you find financial security.
Bankruptcy lawyers Richard Chang and Steven Diamond have worked together since 1995. At Chang & Diamond, APC, in San Diego & Riverside County, California, we work to dispel the stigma of bankruptcy. We provide all-inclusive client services in the following areas: Chapter 7 bankruptcy; Chapter 13 bankruptcy; recovery from bankruptcy; asset protection and exemptions; foreclosure, repossession, and harassment; and bankruptcy during divorce. Discover how we can help you find financial security.
Bankruptcy lawyers Richard Chang and Steven Diamond have worked together since 1995. At Chang & Diamond, APC, in San Diego & Riverside County, California, we work to dispel the stigma of bankruptcy. We provide all-inclusive client services in the following areas: Chapter 7 bankruptcy; Chapter 13 bankruptcy; recovery from bankruptcy; asset protection and exemptions; foreclosure, repossession, and harassment; and bankruptcy during divorce. Discover how we can help you find financial security.
Students from both private and public universities all over the country may also provide low cost or free advice. The sessions will only achieve directing clients to the right legal path in filing the right papers. Note that with the new bankruptcy laws taking into effect making the bankruptcy filing process more difficult than usual, an experienced bankruptcy attorney will be worth your money.
Many people who enter the bankruptcy process worry about the fate of their credit. This is actually unnecessary as the bulk of credit damage happens before the bankruptcy process is even initiated. While no one wants the added hassle of rebuilding their credit after resolving debt troubles, doing so can put you leaps ahead of others in the credit game.
Americans are now filing Chapter 7 or 13 Bankruptcy to get their debts under control. Bankruptcy in itself is designed for debt elimination. Chapter 7 bankruptcy functions to cancel out unsecured debt such as utility or medical bills, credit card, etc. Chapter 13 Bankruptcy on the other hand is designed to give individuals more time in repaying all their debts.
Filing for bankruptcy is good news whenever you are struggling with your credit card debt, mortgage or medical bills. Bankruptcy laws help families and individuals in their debt struggles. You have two options on how to deal with your debt problems, Chapter 7 (debt elimination) and Chapter 13 (reorganization). Always remember that you can regain credit again after successfully filing your bankruptcy.
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Bankruptcy lawyers Richard Chang and Steven Diamond have worked together since 1995. At Chang & Diamond, APC, in San Diego & Riverside County, California, we work to dispel the stigma of bankruptcy. We provide all-inclusive client services in the following areas: Chapter 7 bankruptcy; Chapter 13 bankruptcy; recovery from bankruptcy; asset protection and exemptions; foreclosure, repossession, and harassment; and bankruptcy during divorce. Discover how we can help you find financial security.
Bankruptcy lawyers Richard Chang and Steven Diamond have worked together since 1995. At Chang & Diamond, APC, in San Diego & Riverside County, California, we work to dispel the stigma of bankruptcy. We provide all-inclusive client services in the following areas: Chapter 7 bankruptcy; Chapter 13 bankruptcy; recovery from bankruptcy; asset protection and exemptions; foreclosure, repossession, and harassment; and bankruptcy during divorce. Discover how we can help you find financial security.
Bankruptcy lawyers Richard Chang and Steven Diamond have worked together since 1995. At Chang & Diamond, APC, in San Diego & Riverside County, California, we work to dispel the stigma of bankruptcy. We provide all-inclusive client services in the following areas: Chapter 7 bankruptcy; Chapter 13 bankruptcy; recovery from bankruptcy; asset protection and exemptions; foreclosure, repossession, and harassment; and bankruptcy during divorce. Discover how we can help you find financial security.
Bankruptcy lawyers Richard Chang and Steven Diamond have worked together since 1995. At Chang & Diamond, APC, in San Diego & Riverside County, California, we work to dispel the stigma of bankruptcy. We provide all-inclusive client services in the following areas: Chapter 7 bankruptcy; Chapter 13 bankruptcy; recovery from bankruptcy; asset protection and exemptions; foreclosure, repossession, and harassment; and bankruptcy during divorce. Discover how we can help you find financial security.
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