2005 Bankruptcy Reform Legislation Blamed for Foreclosure Crisis

Many are by now aware of the new bankruptcy laws that took effect in October 2005. Now, researchers at the Federal Reserve Bank of New York have concluded that the bankruptcy reform legislation has contributed significantly to the subprime mortgage foreclosure crisis. They're reasoning in part involves the favorable treatment afforded credit card and auto lenders, and the shifting of risk from those lenders to mortgage lenders. Under existing bankruptcy law, those with incomes above a certain "means" level do not qualify for Chapter 7 bankruptcy relief as they once did under the old law. Increasing unemployment will have a positive effect on the availability of bankruptcy, the researchers concluded, because those without income for the six months prior to a bankruptcy filing will not need to satisfy the "means test" and will fall below the median income cutoff that might otherwise disqualify them from filing for Chapter 7.

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