Bankruptcy Reform Law Causes Mortgage Default to Rise?
A new study by the National Bureau of Economic Research suggests that the 2005 bankruptcy reform law added to the housing crisis 200,000 more mortgage defaults each year.
“Bankruptcy reform squeezed homeowners’ budgets by raising the cost of filing for bankruptcy and reducing the amount of debt discharged in bankruptcy,” according to the report by 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.
I agree with both their points
Bankruptcy reform added to the housing crisis because it made filing bankruptcy harder and more expensive. Some people, who could have filed bankruptcy to lose the credit cards and save the house, couldn’t move fast enough. By the time they got rid of the credit cards, the house was too far gone.
Bankruptcy reform also added to the housing crisis in a second way. The budget in the 2005 law is unrealistically low for people with big families. Especially in expensive urban areas. So, some people who tried to use Chapter 13 to catch up the house could not make the Chapter 13 payment and also feed their children. The food budget is just too low. The only way people could feed the kids was to let the house go.
I think there’s a third point. People were scared by news coverage of bankruptcy reform. They believed that bankruptcy could no longer help them. They thought the door of the courthouse was locked. Many of those people got caught in foreclosure rescue scams and debt settlement scams, and never talked to a competent bankruptcy lawyer.
The country is paying a big price. The banks got their bailout loans when they needed them, but rising defaults and falling real estate values hurt every homeowner in America. Bankruptcy reform is a part, only a small part, of what triggered this crisis.