The new bankruptcy laws were passed in 2005 when mortgage companies and financial investment firms were artificially pumping money into the housing market to create a huge bubble. Ostensibly, these new laws were meant to curb the large problem of homeowners or borrowers taking out loans, spending too much, defaulting, and declaring bankruptcy to get away from their obligations. With the collapse of the economy and rising prices all around, however, it is becoming clearer by the day how poor legislators’ and banks’ assumptions were about how the average debtor responds to financial crisis.
First off, there was little evidence of borrowers taking out too many loans voluntarily and then deciding to stop paying and abuse the bankruptcy code to discharge their wasteful spending. On the contrary, the vast majority of people who declare bankruptcy do so only after a severe financial hardship makes it impossible for them to continue paying their bills. They may take out more loans to pay back previous loans and try to get ahead by falling further behind, but few homeowners ever just decide to stop making payments.
But the banks thought that they could trap consumers into paying back as much of their debts as they had income to spend repaying, and legislators elected by the people to protect them from this kind of predation readily agreed with the banks who financed their political campaigns. Thus, the stage was set for lenders to hand out any type of garbage loan they could come up with to people who had little income or assets, as they assumed the draconian bankruptcy laws would allow them to put their borrowers into debt slavery for 3-5 years in bankruptcy.
Even this plan to make as much money as possible with one more reason to make subprime mortgages, however, has begun to unravel, and bankruptcy filings which had slightly dropped after the laws were passed have now come back to pre-reform levels. But now there is a lot more toxic debt floating around in the housing market, a result of homeowners being given loans that they would not qualify for in the presence of sane lending guidelines. When mortgage companies thought they had another government crutch to lean upon in the bankruptcy reforms, there was little reason not to make bad loans.
Another irony is that even bankruptcy courts are now realizing that the real abusers of the process are the lenders, not the borrowers. Mortgage lenders routinely add extra fees and charges in such large amounts that the conscience is shocked, and their communication skills with the trustee and the courts as just as poor as they are with homeowners themselves when trying to avoid foreclosure. So the new laws were designed to prevent lenders from being taken advantage of, but the result has been to make it more difficult for borrowers to file bankruptcy while creditors continue to engage in predatory practices against homeowners and courts.
Nearly every law that comes out of the federal government these days seems to have the effect of empowering sociopathic corporations to engage in acts that work against the interests of their clients and people in general. These laws, however, eventually manifest the unintended consequences government intervention engenders, but even this is usually used as another excuse to expand the powers of politicians and banks to prey on the productive sectors of society. This is why it will be up to communities, private organizations, and local governments to come up with solutions to the foreclosure crisis and economic depression; beware anymore help and reform from Washington.