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New York Fed Report Says Bankruptcy Law Changes Likely Increased Foreclosures

February 15, 2011

As Riverside County consumer bankruptcy attorneys, we were wary about the 2005 changes to federal bankruptcy law when it happened. So we were very interested to see a new report from the Federal Reserve Bank of New York saying those changes contributed to the rise in foreclosures in the six years since. The report (PDF), released Feb. 8, uses bankruptcy filing statistics and foreclosure statistics from before and after October of 20005 to support its conclusions. Co-authors Donald Morgan, Benjamin Iverson and Matthew Botsch found that the law contributed to the rise in foreclosures by reducing filers' financial flexibility in bankruptcy by shunting them into Chapter 13 repayment plans.

One of the major changes made by the Bankruptcy Abuse and Prevention Consumer Protection Act was requiring more filers to file Chapter 13, which uses a long-term repayment plan. This generally results in the filers paying back more of their debt and having less forgiven by the court. Prior to BAPCPA, the authors wrote, families in financial trouble could free up money to pay their mortgages by discharging more of their other kinds of debts. BAPCPA took away that option for many filers, and the authors theorized that there should therefore be more subprime foreclosures in states that allow filers to keep larger amounts of home equity.

This was reflected in the data, the authors wrote; subprime mortgages that were already in bankruptcy saw a rise in foreclosures directly after BAPCPA took effect. Their mathematical analysis showed that for a state with an average bankruptcy exemption size, the average rate of foreclosures of subprime loans was 11 percent higher after BAPCPA. That means about 29,000 extra subprime foreclosures per quarter across the U.S., they said.

The authors are careful to acknowledge that other factors also played a role in the foreclosure crisis, including dropping home prices and loose lending standards. But they concluded that bankruptcy law changes also played a role. As Costa Mesa individual bankruptcy lawyers, we're pleased to have a well-written study showing what a lot of bankruptcy lawyers were saying all along: that these changes would be bad for consumers. As the Fed said, the changes essentially made the protections of bankruptcy less available, particularly for loans secured by physical property, including mortgages. As a result, bankruptcy filers couldn't get much help paying their mortgages because they needed their limited incomes to pay back unsecured debt. We hardly need to describe what the resulting wave of foreclosures has done to the economy.

Howard Law PC represents clients who are ready to face their debt head-on in order to get help repaying it, discharging it and moving on. That includes debt from a home mortgage as well as unsecured debts from credit cards, medical bills and more. Our Cypress personal bankruptcy attorneys start every case by reviewing the client's finances to see if bankruptcy is appropriate. If not, we can sometimes offer alternative help such as a foreclosure defense lawsuit. When bankruptcy is the right choice, we help clients through the complex legal, financial and emotional process of documenting their finances, choosing the right exemptions and making a repayment plan (when necessary). We want every client to make a fresh start with all of their debts in the past and the tools to build a strong financial future.

If you're considering bankruptcy, you should call Howard Law for a free, confidential evaluation of your case. To set up a meeting, contact us online or call toll-free at 1-800-872-5925.