Bankruptcy Law A Disaster

The idea of the 2005 bankruptcy "reform" law was that it would stop abusive filings and as a result everyone would be better off, except the shameless few who were abusing the system. We were sold this bill of goods so effectively that many of us who are usually quite compassionate felt the reforms probably made sense. After all, shouldn’t it be difficult to file for bankruptcy?

The resulting mess was legislation that bankruptcy judges are calling a colossal failure.

• "Unquestionably, this is the most poorly written piece of legislation that I or anyone else has ever seen," U.S. Bankruptcy Judge Keith M. Lundin of Tennessee (31 years of experience) is quoted as saying in an article on bankruptcy reform published by In These Times.

• "It’s such a poorly thought out piece of legislation," says Henry E. Hildebrand, a U.S. bankruptcy trustee in Nashville, Tennessee in the same piece.

• U.S Bankrupcty Judge Frank R. Monroe published an opinion that essentially accused the credit industry and Congress of colluding "to make more money off the backs of consumers in this country."

Bankruptcy attorneys everywhere are expressing tremendous frustration in their ability to help consumers suffering from the perfect storm of bad mortgages, credit card card debt, stagnant wages or unemployment, and rising food and fuel prices.

For the credit industry, a word to the wise: Sometimes you don’t get what you paid for. They wanted fewer bankruptcies  (more money) but filings are still rising, even with the new law. All predictions are they will reach the one million mark this year – a number not seen since the bankruptcy law was changed in 2005. As for making money as a result of these changes, apparently that’s also a fantasy according to bankruptcy researchers. (I wonder if the credit industry has recouped the millions spent lobbying for it yet?)

Clearly the bankruptcy law is broken, and needs to be fixed. An overhaul is not likely at the moment, but there is an immediate issue that can and should be addressed: helping consumers save their homes by allowing loans to be modified in bankruptcy.

The Center For Responsible Lending says that by lifting the ban on court-supervised loan modifications for qualified homeowners in bankruptcy, Congress can help communities retain an estimated $89 million in tax revenues and save at least 600,000 homes from foreclosures.

HR 3609, the "Emergency Home Ownership and Mortgage Equity Protection Act"  would enable bankruptcy judges to allow these modifications in cases where it makes sense. Essentially, a bankruptcy judge would be able to order a lender to modify a loan if he or she determined the homeowner could afford keep his or her home. (Additional guidelines would have to be met.) This solution will cost taxpayers nothing, and in the end will likely save lenders a tremendous amount of money they would otherwise lose through foreclosures, short sales, and a continuing decline in home values. (What many people don’t realize is that some loan servicers can’t modify loans even if they want to help homeowners avoid foreclosure!)

Unfortunately that legislation has been "put on hold" but my sources say it’s not a dead issue by any means. So let’s do something about it.

While bankruptcy reform may not save every home, it’s the single best
commonsense way to help the greatest number of homeowners at one time,
without costing taxpayers anything, Kathleen Day at the Center for Responsible Lending explained to me. I agree.

So speak up! Are you worried about keeping your home? Did you lose your home to foreclosure, or do you know someone who has or will? Is your neighborhood, county or state at risk of being hurt by foreclosures, and the corresponding loss in home values and tax revenues? Write to your Congressional Representative and Senators, the Presidential candidates, and even your local newspaper.

Gerri Detweiler
– Personal finance author, radio host and credit expert. Gerri
contributes budgeting, debt recovery and savings information online. She is also the co-author (with Mary Reed and attorney John Ventura) of the forthcoming Credit.com book, Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts.

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Gerri Detweiler Credit.com's Personal Finance Expert, Gerri focuses on financial legislation, budgeting, debt recovery and consumer savings information. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.comTalk Credit Radio. Reach Gerri at creditexperts@credit.com.