Did bankruptcy changes help hit subprime?
Subprime lenders have recently faced a reversal of fortune. Why? One lender is suggesting that, when Congress made it harder not to pay your debts in '05, lenders with risky mortgages ended up taking the hit.
The data from Credit Suisse is clear. Fewer borrowers in foreclosure are filing bankruptcy since the '05 amendments. 
This is good, right?
Wrong.
Filing bankruptcy lets a home owner halt a foreclosure. It is often the only way to buy some time, get some cash together, make credible threats to collection agents, and emerge with their house and payment schedule intact. With the 50% drop in filings by home owners facing foreclosure, more people are going to lose their homes, and more lenders are going to lose their expected cash flows and get saddled with properties they don't really want.
Surely this isn't the only reason for the recent subprime meltdown (and probably isn't a major one, either) but judging from the Credit Suisse report, it's hardly what those lenders expected they were getting from the '05 law.
I could be wrong, but I think to keep a home in a bankruptcy you have to file chapter 13, not 7 (which liquidates all debts), and chapter 13 is still available to all filers regardless of income, albeit the payment plan period is now stretched out to five years.
March 19, 2007 6:37 PM | Reply | Permalink
Another thing to keep in mind is that only 22% of all Chapter 13 cases that were filed under the old law completed their plans. Now that more cases have to go a full 60 months, there is a greater chance for failure.
Satellite Sky Blog
Find the Truth. Do Justice.
March 19, 2007 9:08 PM | Reply | Permalink
This is sooo true, especially when the repayment plans under the new bankruptcy law are based on a budget created by the IRS. This mandated budget for the one in bankruptcy is unrealistic, and sets the person up for failure. It is no wonder they fall out of their Chapter 13. I think this was carefully thought through by the authors of the bankrupty law to corner people into either not taking advantage of bankruptcy protection or losing their bankruptcy protection altogether.
Jim Anderson
The Truth About Credit
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March 20, 2007 10:15 AM | Reply | Permalink
I think the previous poster was talking about the old bankruptcy law, where repayment (chap 13) plans took account of individual circumstances rather than being "one size fits all" as under the current "reform". And I have to admit I'm surprised at the stats for the old Chap 13: did most of these people end up converting to Chap 7 as a result of some subsequent economic calamity?
March 20, 2007 5:44 PM | Reply | Permalink
When they could, they did. Sometimes they couldn't because of the statute of limitations problem (which is now even longer). Sometimes they could not afford to convert to chapter 7 because they had non-exempt assets.
Now it is harder because you have to redo the means test and requalify. If a person had to try to convert to chapter 7 because their income went down, it may be several months before they qualified under the chapter 7 means test. By that time their case would get dismissed and they would have to pay the court costs and attorney fees all over again.
The means test takes the average of a debtor's income over the previous six months. And that is not the same as the 60-day Pay Advices that have to be refiled as well.
It has been discussed before, but one of the consequences (intended or not) is that it is much more risky to fail in business now. I have heard that some 90% of all new businesses fail.
The new bankruptcy law is bad policy for a country that is supposed to thrive on economic dynamism.
Satellite Sky Blog
Find the Truth. Do Justice.
March 21, 2007 10:23 AM | Reply | Permalink