Bankruptcy laws used to be a lot more permissive. But in 2005, Washington Mutual, Bank of
America, JPMorgan Chase & Co, and Citigroup got together with $25 million
and lobbied for a change in consumer
bankruptcy.
Prior to those changes, bankruptcy was much easier to claim. You could file for Chapter 7 or Chapter 13, shake off a good amount of debt, and often start fresh with your finances. It was a good deal for people saddled with crippling debt—especially credit debt. But with the 2005 bankruptcy law, credit debt suddenly became much, much more difficult to buck.
Now, the Examiner claims, credit debt is finally being paid off-- but those payments have cost banks like Washington Mutual billions of dollars in write-downs as more and more people have foreclosed on their homes. Even worse, those same banks are looking to increase mortgage bills “by an average of 40 percent in the next 18 months”[1] to balance out the massive increase in foreclosure-related debt. And the reason for these increased foreclosures lies in the details of the new bankruptcy laws and changes to Chapter 7.
Chapter 7, sometimes called “liquidation bankruptcy,” is a type of bankruptcy that allows certain debts to be discharged or negated. Discharged debts do not have to be paid, although the consumer will often have to sell off some of his or her property in order to meet those debts that remain. BUT—properties like homes, vehicles, and insurance policies are often exempt, which means no foreclosure. However, as more consumers are forced to file under Chapter 13, their unprotected, non-exempt property (including their homes!) often becomes meat for the sacrificial fire.
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[1] Howley, Kathleen M.. "Slump exposes bankruptcy law flaws." The Examiner 12 November 2007 : 12.
by Kate Beall
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