August 21, 2007

Atrios somewhat reticently links to this post, which posits that the changes incurred by the 2005 BARF legislation are somehow related to the high rate of foreclosures we're currently seeing. Under the old law, the hypothesis goes, the generous terms by which someone could file Chapter 7 allowed many a homeowner to save his home, receiving a breathing space in which he could stop the forced sale of his property and come current on his mortgage. As someone who loathes the BARF, and who has repeatedly spelled out some of its egregious after-effects, as well as many of its unintended consequences, such as the devastation to the credit card industry caused by the mere passage of the law, it is a tempting position, but one that I just don't buy.

You see, in American bankruptcy law, there are two avenues available for most consumers, Chapter 7 and Chapter 13. Choosing either avenue imposes a court order, called a stay, that stops all debt collection activity, including foreclosures and civil lawsuits. In Chapter 7 cases, the consumer files his paperwork listing his assets and debts, as well as his monthly income and expenses, and more than 9 out of 10 times, the court-appointed Trustee will determine, after a public meeting to which creditors are invited, that the debtor has no assets to liquidate. Thereafter, the consumer receives a discharge, forgiving his unsecured debts; the whole process usually takes four months, tops, although the courts in L.A. are still dealing from the huge backlog of cases resulting from YBK in October, 2005.

However, a Chapter 7 does little to protect the consumer from the Big Bad Wolf trying to foreclose, either now or in the golden, pre-BARF era that was so friendly to consumers. The automatic stay provides a temporary reprieve, but secured creditors like mortgage lenders have always been able to take advantage of a remedy under the law, the Motion for Relief. That motion gives the lender the ability to go before the court and ask that the automatic stay be lifted so that foreclosure proceedings (or evictions) may continue.

Filing such motions is what I used to do for a living, and unless the property involved had a huge equity cushion (exceedingly rare in Chapter 7 cases, since the debtor would presumably borrow off the equity first to pay his debts), I always won. In fact, I was expected to have an order signed by the judge and in my client's hands within six weeks of the case being filed; if it was a repeat filer, I would seek an order for the matter to be heard ex parte, so it wasn't unusual for the client to be able to resume the foreclosure process within three weeks of the filing. And that was under the old law.

Both before and after 2005, homeowners who wanted to stop foreclosures and save their homes filed Chapter 13 bankruptcies. The Chapter 13 case is the preferred option of the authors of the new law, in that it imposes a repayment plan, usually over five years, on the debtor. Since the mortgage lender receives payment on its arrearages over the lifetime of the plan, it is protected, and the court won't grant relief from stay allowing it to pursue the foreclosure.

The problem with the new law is that it imposes additional costs on many debtors, particularly non-homeowners, who make above the median average income in their state. It doesn't impede homeowners from saving their investment through the bankruptcy courts, any more than the old law did. And the old law certainly didn't give a serious breathing spell to those homeowners who filed a Chapter 7 to stop a foreclosure. Joe Biden can be blamed for a lot of things, but not the high foreclosure rate.

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