The Link Between The "New" Bankruptcy Law and Foreclosure.
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Did the New Bankruptcy Law Lead to Foreclosures?

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Many Americans struggling with rising costs of gas, food and mortgage payments decide on filing bankruptcy in an attempt to get a fresh start on their finances.

In fact, Chapter 13 bankruptcy is often cited as a go-to for those looking to stop foreclosure: because of its automatic stay and relatively long process, reorganization bankruptcy (Ch 13) allows debtors to catch up on debts without worrying about foreclosure and other collection efforts.

But, according to a recent report from HometownAnnapolis.com, some homeowners' decision to file bankruptcy may have actually contributed to their current foreclosure troubles.

Background - The Effect of the New Filing Bankruptcy Law

In October 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect after many years and hundreds of millions of dollars of lobbying by credit card companies. The new law was designed to make certain debts (including credit card debt) more difficult to discharge during bankruptcy.

BAPCPA also introduced the credit counseling briefing, the debtor education course and the Chapter 7 means test. The means test serves to make sure only those with very little expendable income can file under Chapter 7 of the U.S. Bankruptcy Code and have most of their unsecured debts forgiven by the court.

After Congress announced that BAPCPA had passed and before the law took effect, Americans rushed to file for personal bankruptcy, apparently believing they wouldn't qualify with the new restrictions.

In fact, in October 2005, more than 600,000 Americans reportedly filed bankruptcy.

In October 2004, only 130,679 cases had been filed.

Only in recent months have consumer bankruptcy filings come close to reaching pre-BAPCPA levels. The American Bankruptcy Institute (ABI) recently reported that the 92,291 consumer bankruptcy filings this past April represented a 47.7 percent increase over the same period last year.

The Unexpected Bankruptcy/Foreclosure Link

It seems that the rash of pre-BAPCPA bankruptcy filings meant that many people who were financially struggling - but still managing - decided to file well before they normally would have, for fear that the new laws would prohibit them from doing so in the future.

But, because a bankruptcy filing stays on your credit report for 10 years and has the most impact in the first couple years after filing, many of these filers may have regretted their decision to jump the gun.

Sources indicate that many filers found themselves defaulting on mortgage payments in the years following their filing - but unable to do anything about it. Because of the recent bankruptcy filing on their credit reports, lenders were apparently unwilling to offer them refinanced mortgage loans.

The result, for some, was evidently foreclosure.

Bankruptcy Courts and Mortgages

Thanks to an old law meant to protect mortgage lenders and keep the price of home loans fairly reasonable, bankruptcy courts cannot modify the terms of a mortgage. So, while filing for bankruptcy can help families make their mortgage payments by catching up on or getting rid of other debts, it can't change the terms of a problematic mortgage.

Plus, once you file bankruptcy, you're not eligible to do so again for several years, so families who filed in 2005 and are struggling with mortgages or facing foreclosure now don't have that safety net yet.


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