Bankruptcy Numbers Soar — Foreclosures To Follow
Bankruptcy filings were up 33.3 percent during the past year according to the Administrative Office of the U.S. Courts. Between March 2008 and March 2009 there were 1.2 million bankruptcies compared with 902,000 during the prior year. Of this year’s bankruptcy filings only 49,000 involved businesses, the rest were all personal bankruptcies.
The rising bankruptcy numbers are remarkable because the system was tilted grossly in favor of banks, credit card companies and student lenders under the so-called Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, legislation. Since the 2005 law went into effect during October 2006 it has been vastly more difficult to declare bankruptcy and get rid of debts.
Automatic Six-Month Delay
Among other features, the 2005 legislation provided that individuals would have to get 180 days of counseling (six months) before they could declare bankruptcy — meaning that in most states homes will be foreclosed before someone can even seek protection in a bankruptcy court. However, even if someone is able to get to court, judges are NOT allowed to modify mortgages on prime residences though they can modify loans on second homes, airplanes and yachts.
Because mortgages cannot be modified in a bankruptcy court — what the lending industry calls a cramdown — foreclosure levels are artificially increased. In other words, if mortgages could be treated like other debts and modified then many foreclosures could be avoided.
Traditionally, the concept of bankruptcy, forgiveness and leniency toward debtors goes back to the Bible. Deuteronomy says there should be a period of “remission” ever seven years, a time when unpaid debts are forgiven. Leviticus provides that every 50 years there should be a jubilee year — another one-year period when all debts are forgiven.
Efforts to reform the bankruptcy system have so far failed this year on Capitol Hill.
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