Bankruptcy laws were significantly changed in 2005, and filings went way down.
A new study suggests bankruptcy reform accelerated the.
The theory is simple enough.
People who file bankruptcy and get rid of credit card and other debt, have more money available to pay the mortgage payments, and stay out of foreclosure.
So, if the bankruptcy law changes made it harder to file, which no one disputes, even keeping some people from filing for bankruptcy relief, they could not get rid of that credit card and other debt, and so could not afford their mortgage payments.
The study assumes the bankruptcy law changes kept some people from filing, based on the big decline in bankruptcy cases after the law changed.
The study concludes “bankruptcy reform caused the number of mortgage defaults to increase by around 200,000 per year even before the start of the financial crisis. ” Did Bankruptcy Reform Cause Mortgage Default Rates to Rise?, by Wenli Li, Michelle J. White, and Ning Zhu.
They did not make the next calculation, how many more foreclosures occurred because of the extra 200,000 defaults per year.
But, that number would be large.
My own view has always been that creditors did not collect a lot more money because the law kept some people from filing.
Most of my clients file because they do not have the money to pay their debts, and keeping them from filing does not put any money into their pockets with which to pay those debts.
They are still broke.
They face foreclosure whether they could file bankruptcy or not.
So, I doubt the conclusion of the study.
The real villains of the foreclosure crisis remain Greenspan, who pumped up the money supply which fueled the mortgage lending boom, the bean counters and regulators who let the banks carry speculative mortgage investments off their books (so-called SIVs, Special Investment Vehicles), FANNIE MAE and FREDDIE MAC for buying all the junk, the ratings agencies who rated the crappy mortgage securities just under U. S. government grade debt, the crooked mortgage brokers who changed the papers to make the deal go through, the appraisers they used who magically found every home to be worth the amount needed to make the mortgage go through.
I may be forgetting someone, that is off the top of my head.
Bankruptcy reform was a bad idea, it did not do what the creditors wanted, it made filing more costly and complicated without any measurable good effect.
But I do not believe it added to the foreclosure crisis.
Did Bankruptcy Reform Worsen Foreclosure Crisis?