March 28, 2005

Under current bankruptcy law, homeowners who suffer temporary setbacks, either at work or due to medical expenses, can file what is known as a Chapter 13 petition, where they can pay off the amount they've fallen behind on their mortgage over a period of time (usually between 3-5 years). It has been a remarkably successful method for some to keep their homes while rebuilding their credit, but according to this article, the new "reform" is going to sabotage Chapter 13 by giving greater priority to credit card debt, and by abolishing "cram downs", where a financially distressed debtor is allowed to reduce the amount owed on car loans to the actual depreciated value of the car, rather than the inflated (and typically usurious) amount in the original loan. The result, according to the bankruptcy judges they interviewed, will be a complete breakdown of a system that had been working quite well at enabling creditors to recover over $3 billion a year in outstanding loans.

On the other hand, foreclosure specialists are going to party like its 1999...I wonder if we're going to see something along the lines of judicial nullification when this law gets passed. Much of the proposed law, including provisions concerning the imposition of repayment plans when a debtor earns more than an arbitrary, pre-set level of income, requires a court order first, and judges maintain the discretion not to force the debtor into a repayment plan if the debtor can establish "special circumstances" that justify certain expenses. I can guarantee you that many bankruptcy judges will bend over backwards to define "special circumstances" in such a way as to permit all but the most egregious cases to remain in Chapter 7; the phrase, "special circumstances" almost begs to be given the sort of improvisation that an activist judiciary can muster.

And of course, there will be just enough pricks in the judiciary to give the term the most anally retentive definition possible; that split is exactly what will make the practice of ordinary Chapter 7 law so lucrative for specialists such as myself. The bankruptcy "reform" bill, stitched together as it was by credit card industry trolls and Federalist Society profs at non-elite law schools, with seemingly no contribution from anyone who's ever had any day-to-day experience in the trenchs, is going to become a joke the moment it goes into effect.

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