NY Federal Reserve Links Foreclosure Crisis to Bankruptcy Reform
It's a hollow victory to be told that you were right after the damage is done, so we can take small pleasure in the fact that the New York Federal Reserve has taken note that the 2005 bankruptcy reform might have harmed the economy. In fact, three researchers at the New York Fed are calling the impact of the Bankruptcy Abuse Prevention and Consumer Protection Act "seismic".
As bankruptcy attorneys across the country pointed out in the days (and years) leading up to the passage of BAPCPA, making it more difficult to file for bankruptcy didn't make resources magically appear in the hands of cash-strapped debtors who might otherwise have been filing for Chapter 7 bankruptcy. Some people would be prevented from discharging debts, but that didn't mean they'd have the means to pay them.
The credit industry, long on optimism and low on reason, clung to the idea that consumer debtors could be forced to pay their credit card bills and other unsecured debts, even if they didn't have enough money to do so.
Turns out they were right, according to these researchers. According to the report, debtors who could otherwise have filed for Chapter 7 bankruptcy, discharged unsecured debts and put their limited resources into saving their homes were instead forced into Chapter 13 bankruptcy, where funds that might otherwise have paid mortgages were diverted to unsecured debt. Before BAPCPA, relative mortgage performance improved as the number of bankruptcy filings increased, but that trend has reversed.
The study appears to leave some open questions, and many bankruptcy experts--even those who were firmly opposed to BAPCPA--appear skeptical about the extent of the impact. Read the full report from the New York Federal Reserve here: Seismic Effects of the Bankruptcy Reform
