Monday, November 05, 2007

Bankruptcy Reform Bites Back
The irony here is that Congress passed this law at the behest of lenders who didn't want consumers to get out of their credit card debts through bankruptcy. But the result, given the collapse of housing prices, is that people are defaulting on their mortgages, which is clobbering a different set of lenders.

Score one for the law of unintended consequences. In past periods of economic turbulence, American households were able to escape mountains of bad debt—and keep their homes—by declaring bankruptcy. During the weak growth years from 2001 to 2003, for example, nonbusiness bankruptcy petitions averaged roughly 1.5 million per year. Lenders complained bitterly that bankruptcy was too easy, but because financially stressed Americans could write off their credit card and other consumer debt, they had more money available to pay their mortgages. But today's growing problem in the housing market is different—foreclosures are soaring, while bankruptcies, though clearly on the upswing, are running roughly at half the 2001-2003 pace. The reason: A new bankruptcy law, approved by Congress in 2005 after years of debate, makes it much harder for households to get out from under their consumer debt. The result: More people being forced to walk away from their homes, leaving lenders holding the bag.

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