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Law of Unintended Consequences Hurts Big Banks

May 14, 2010

In 2004 and 2005, the banking industry spent millions lobbying for tougher bankruptcy laws. Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. collectively spent $25 million during that period. The big banks’ efforts paid off in a major overhaul of the Bankruptcy Code in 2005 making it more difficult for struggling families to discharge credit card debt. However, the banks did not foresee the current housing crisis, and new research suggests that the 2005 changes to the Bankruptcy Code may have caused mortgage default rates to rise.

A paper published by the National Bureau of Economic Research states that the 2005 changes “raised the cost of filing and reduced the amount of debt that is discharged" thereby making it more difficult for debtors "to shift funds from paying other debts to paying their mortgages[.]" In other words, before the 2005 changes, many debtors struggling with a mortgage arrears and credit card debt could file bankruptcy, discharge the credit card debt, and free-up money to pay the mortgage. The new bankruptcy provisions make this process more difficult. As a result, fewer debtors are able to afford to save their homes through the bankruptcy process.

Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank said, "Be careful what you wish for. [The banks] wanted to make sure that people kept paying their credit cards, and what they’re getting is more foreclosures."
If you are facing overwhelming debt and want to keep your home, there are many alternatives available to you. An experienced bankruptcy attorney can review your finances and explain your legal options for discharging or repaying your debts. Bankruptcy is not the only option for saving a home from foreclosure, and many cases are successfully resolved using a combination of bankruptcy and non-bankruptcy methods. Get the facts today and solve your debt dilemma!



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