Three economists recently concluded that the Bankruptcy Reform Act of 2005 was a significant cause of the mortgage crisis and current recession because it had the effect of greatly increasing mortgage delinquencies.
The economists suggested that the new bankruptcy laws, frequently referred to as BAPCPA, “squeezed homeowners’ budgets by raising the cost of filing for bankruptcy and reducing the amount of debt discharged in bankruptcy. It therefore increaased mortgage default by closing off a popular procedure that previously helped financially distressed homeowners save their homes.”
The increase in mortgage default rates were certainly an unintended consequence of bankruptcy reform. However, this smacks of a situation of be-careful-what-you-wish-for, as lobbying efforts by the banking industry were the main reason why Congress agreed to change the laws.
The report by the economists was published by the National Bureau of Economic Research. The three respected economists consisted of 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.
How Did Bankruptcy Reform Lead to the Mortgage Crisis?
The economists theorized that the new bankruptcy laws made it more difficult for homeowners to avail themselves of bankruptcy to save their homes.
They concluded that BAPCPA was a factor in an additional 159,000 mortgage defaults a year.
In addition, they concluded that the bankruptcy means test created difficulty for some homeowners, making them unable to file for Chapter 13 relief. They believed that this contributed to an additional 36,000 defaults per year.
Despite these conclusions, the great majority of clients that we meet with in our Long Island bankruptcy law offices are able to utilize bankruptcy to get relief from their debts and address foreclosure issues.