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Reforms Could Backfire.(bankruptcy reforms)
New York -- The bankruptcy reforms enacted last October were backed nearly unanimously by creditors, including the mortgage industry, but now some experts see a possible dark cloud on the horizon for mortgage lenders.
By making it more difficult for consumers to discharge unsecured debt under Chapter 7 of the bankruptcy code, the new rules could leave some consumers so overburdened by debt that they default on their mortgage loans. Essentially, troubled homeowners will have more trouble reducing debt and reinstating a defaulted mortgage, because they can't shed unsecured consumer debt as easily as they could under the old rules.
Brian Spero, head of the USFN, an association of mortgage banking attorneys, said that it is too early to sort out all of consequences of the new bankruptcy rules. But he tends to agree with the analysis that the law could lead to an increase in mortgage defaults.
"My sense of the Bankruptcy Reform Act is that it was really pushed by the unsecured debt industry, so to the extent it affects the mortgage industry, I think it may have some unintended effects," he said. Mr. Spero is an attorney with Partridge, Snow & Hahn, which represents creditors in Rhode Island and Massachusetts.
That said, he pointed out that consumers still have the option of filing under Chapter 13, which is generally preferable for many borrowers with assets such as a home to protect. Still, relatively few Chapter 13 repayment plans are successful, Mr. Spero noted.
John Ayer, a former U.S. bankruptcy judge who is now a law professor at the University of California Davis, ...
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Source: HighBeam Research, Reforms Could Backfire.(bankruptcy reforms)