August 06, 2007

Prof. Kleiman examines the current fallout from the collapse of the real estate market, and states a rather obvious point, which is that Congress should revisit the 2005 BARF legislation to make it easier for delinquent homeowners to obtain bankruptcy relief. The first place to start would be to modify or annul 11 U.S.C. §1328(f), which forbids filers from obtaining a Chapter 13 discharge if they had received a Chapter 7 discharge in the previous four years (a so-called "Chapter 20"), or another Chapter 13 discharge within the previous two years. Or at least that's what it appears to say; the whole measure seems to have been drafted by the Regent U. Law School after a weekend kegger, and the courts have pretty much thrown their hands into the air trying to figure it out.

Chapter 13s are the preferred alternative for debtors who wish to keep their homes, while paying off the arrearage every month over a 3-5 year period. The standard bankruptcy, under Chapter 7, is geared toward protecting those who are current on secured loans (like houses and cars) but delinquent on unsecured debts (ie., credit cards). Section 1328(f) was designed to thwart those who had defaulted on everything except their mortgage from obtaining bankruptcy relief; a family with high medical debts or huge arrearages on their credit cards could no longer give priority to keeping their home over their unsecured debts, then filing again if their financial difficulties continued to the point that they fell behind on their home. With foreclosures spinning out of control, Congress will have to do something to save the mortgage industry, and the draconian features of the BARF legislation aren't helping.

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