by Craig D. Robins, Esq.

We Have Had Harsher Bankruptcy Laws Since 2005. During President Bush’s administration it became more difficult for individual consumers to seek bankruptcy relief. In 2005, after aggressive lobbying efforts by the credit card and banking industries, Congress agreed to enact harsher bankruptcy laws. The 2005 Bankruptcy Amendment Act became effective on October 17, 2005. Thereafter, consumer filings plummeted.

The Economy Has Severely Deteriorated. Since that time, the country’s economic climate has changed dramatically for the worse. After an incredible boom in the housing market, the real estate bubble started bursting in 2007. The following year saw a total collapse of real estate-backed securities. After months of national headlines focusing attention on the sub-prime mortgage meltdown, news shifted to the tightening credit market and the precipitous drop in the stock market. Numerous companies began closing their doors and laying off employees. As the national housing crisis has worsened, foreclosures have climbed to record levels.

Bankruptcies on the Rise Again. Recently-released data reveals that almost 1.1 million Americans filed for bankruptcy in 2008, a 32 percent increase from the prior year, as a recession has forced many consumers to seek protection from creditors. This is a record number of filings since the laws were changed three years ago.

Shift in Public Policy Now Favors Bankruptcy Change. With the worst financial turmoil this country has seen since the Great Depression, there has been a marked shift in public policy towards bailing out the financial sector and the auto industry, and protecting homeowners who can no longer afford to make payments on their mortgages.

 Obama Will Greatly Influence the Future of Bankruptcy.  Judging by statements that he made during his campaign, President-elect Obama will probably seek to reverse some of the harsh changes that Bush put into law. During the campaign, Obama’s web site contained the statement, “Obama and Biden will reform our bankruptcy laws to protect working people.”

Obama will likely seek to change the bankruptcy laws to help people avoid losing their homes, a step that the Bush administration and the mortgage industry have greatly resisted.

As president, Obama will have the ability to control the actual bankruptcy laws, as well as the interpretation of the current or future bankruptcy laws, in several ways. First, it is unlikely that there will be any harsher measures proposed under the new Democratic administration. Thus, any proposed legislation will undoubtedly be pro-debtor, which Obama will probably support and sign into law.

Secondly, Obama will have the ability to shape the judicial interpretation of bankruptcy law for years to come as he will likely be in a position to nominate at least one, if not two, associate justices of the Supreme Court. As Supreme Court decisions often come down to a five-to-four vote, any appointments that Obama makes may end up being determinative of how existing bankruptcy law is interpreted.

Cram-Down Legislation Just Introduced in Senate.  Congressional Democrats have wasted no time in advancing legislation to change bankruptcy rules, with the aim of reducing home foreclosures . On January 6, 2008, Senator Richard Durbin (D-Illinois), the second-ranking Democrat of the U.S. Senate, introduced legislation that would permit debtors in bankruptcy to erase or “cram-down” some mortgage debt.

The legislation, S. 61, is entitled the “Helping Families Save Their Homes in Bankruptcy Act.”

Current bankruptcy law only permits homeowners to cram-down second mortgages, and then, only if the mortgage is totally under-secured by the value of the property. Consumer debtors have been prohibited from modifying mortgages with a cram-down since a 1993 Supreme Court decision that banned the practice.

Senator Durbin previously introduced this new cram-down legislation in 2007, but due to Republican opposition, the measure failed to pass on several occasions The proposed law was almost passed several weeks ago when it was included in the $700 billion bank bailout bill. However, it was removed just before the package finally passed.

Obama Will Likely Sign Cram-Down Laws. There is a good chance the legislation will pass in 2009. President-elect Obama co-sponsored Senator Durbin’s bill in 2008 and said that it would be a priority in 2009. There is also a strong possibility that legislators will attach the bill to Obama’s proposed economic recovery stimulus package now being drafted in Congress, which means that it could be approved as early as February.

There Will Still Be Opposition. The financial services industry will certainly try to fight the proposed reform, claiming that it will increase the cost of obtaining mortgages as banks will absorb large losses and will need to pass along this cost to consumers. However, the circumstances under which the bill previously failed have changed significantly, and home foreclosures are reaching epidemic proportions. With roughly two million foreclosures expected this year, politicians refusing to support the bill will certainly be unpopular. Although the legislation might need to work its way through Congress over a period of several months, many pundits predict that the bill will indeed become law.

Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Nassau Lawyer, the official publication of the Nassau County Bar Association in New York. This article appeared in the February 2008 issue of the Nassau Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

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