A New Chapter for Bankruptcy

[groovedaddy]

THE Obama administration introduced a plan this week to encourage defaulting homeowners to sell their houses at a loss, the latest in a long line of reform packages promising to break the logjam of underwater mortgages. But without major changes to the bankruptcy system, such measures won’t aid the American families torn apart by the economic upheavals of the last two years.

To date, our bankruptcy courts have done little to help the millions of people swimming in debt. Almost 5 percent of mortgage loans are now in foreclosure, an increase of more than 85 percent since the beginning of 2008, and more than 10 percent of credit card accounts are delinquent. Yet bankruptcy filings for the first two months of this year are only 1.5 times what they were two years ago. And even after that increase, current filing levels are far below those in the first half of this decade.

The problem is that our bankruptcy system is too difficult and expensive for the people who use it. The system has always been complicated, but in 2005 Congress made things worse by changing the rules to make it harder for bankrupt people to avoid paying their outstanding bills. Now that the recession has exposed the flaws of the system, Congress should go back to the drawing board and drastically simplify the bankruptcy system.

At the heart of the existing process is a strategic choice between liquidation under Chapter 7 or rehabilitation under Chapter 13. Under Chapter 7, households give up all of their nonessential assets (as determined by the law of the state where they live), but pay nothing out of any future income to clear their debts; those debts are simply erased. Under Chapter 13, households make payments out of future income, but are more likely to retain their homes and automobiles.

http://www.nytimes.com/2010/03/12/opinion/12mann.html?th&emc=th

[DirkGently]

1. Repeal BAPCPA

The 2005 Bankruptcy Abuse Prevention and Consumer (hahaha) Protection Act was a disastrous, poorly designed gift to the credit card banks and car lenders pushed by Bill McCollum and Chuck Grassley. McCollum is a Florida guy (currently Attorney General) and he came by a meeting I attended to talk to bankruptcy lawyers around the time the bill was being passed. It was apparent from even the limited back-and-forth that McCollum had zero idea how bankruptcy worked in practice, or how the proposed reform would work.

It didn't. Bankruptcy is now just more complicated and more expensive and more difficult for consumers, and yet we're all probably paying much more to fund the increases in the U.S. Trustee's Office (a dept. of the DOJ) which is tasked with overseeing things, notably now making sure that many people are kept out of Ch. 7 "liquidation" bankruptcy" for having "too much money." Many bankruptcy judges are openly contemptuous of the poorly drafted and often confusing or contradictory language the banks' lobbyists wrote up.

We also ought to pass the previously-suggested law to allow people to strip down first mortgages to market value, in bankruptcy or otherwise. All lenders get when they foreclose is market value anyway (no one really pursues the excess owed on the note) and yet lenders are apparently perfectly happy to do that rather than working with their borrowers for even a minor reduction in principal. So we get ghost-'burbs full of empty or investor-rented houses, and families have their lives turned upside down looking for a new place to live.