bobbyw24
03-13-2010, 11:55 AM
A New Chapter for Bankruptcy
By RONALD MANN
THE Obama administration introduced a plan this week to encourage defaulting homeowners to sell their houses at a loss, the latest in a long line of reform packages promising to break the logjam of underwater mortgages. But without major changes to the bankruptcy system, such measures won’t aid the American families torn apart by the economic upheavals of the last two years.
To date, our bankruptcy courts have done little to help the millions of people swimming in debt. Almost 5 percent of mortgage loans are now in foreclosure, an increase of more than 85 percent since the beginning of 2008, and more than 10 percent of credit card accounts are delinquent. Yet bankruptcy filings for the first two months of this year are only 1.5 times what they were two years ago. And even after that increase, current filing levels are far below those in the first half of this decade.
The problem is that our bankruptcy system is too difficult and expensive for the people who use it. The system has always been complicated, but in 2005 Congress made things worse by changing the rules to make it harder for bankrupt people to avoid paying their outstanding bills. Now that the recession has exposed the flaws of the system, Congress should go back to the drawing board and drastically simplify the bankruptcy system.
At the heart of the existing process is a strategic choice between liquidation under Chapter 7 or rehabilitation under Chapter 13. Under Chapter 7, households give up all of their nonessential assets (as determined by the law of the state where they live), but pay nothing out of any future income to clear their debts; those debts are simply erased. Under Chapter 13, households make payments out of future income, but are more likely to retain their homes and automobiles.
The 2005 reforms, driven by an exaggerated concern that debtors might game the system, instituted a series of paper-intensive procedural safeguards. All debtors must produce documents that estimate potential increases in expenses or income during the year to come, a monthly net income statement and a complex “means test calculation” that certifies expenditures in a large number of specific, carefully defined categories.
The result is a lawyer- and paperwork-centered system in which the families most in need of quick relief wait months to save up for the filing costs and attorneys’ fees necessary to file a bankruptcy petition. Although total expenses vary a great deal, the statutory filing fees are now almost $300 and lawyer’s fees alone average more than $1,000.
Congress’s 2005 reforms also directly discouraged filings under Chapter 7 (the option typically used by people with few assets) and encouraged filings under Chapter 13 (the traditional procedure for homeowners).
If the bankruptcy system was doing its job, the mortgage-driven financial crisis should then have led to a sharp increase in filings under Chapter 13. Homeowners unable to keep up with their mortgages should have been able to file for relief under Chapter 13, resolve their problems and move on with their lives. Yet the share of Chapter 13 filings fell in 2009 to only 28 percent of all filings, from 42 percent in 2006.
That’s another perverse result of the 2005 reforms: Chapter 13 does not let people avert foreclosure by paying the actual value of their homes, even when their bubble-era mortgages far exceed realistic market prices. In fact, a “special rule” for home mortgages allows lenders to prevent normal bankruptcy relief for borrowers. Thus, the reforms created a system that makes it harder to file for Chapter 7 while doing nothing to make Chapter 13, once the savior of homeowners, useful in this sort of mortgage crisis.
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http://www.nytimes.com/2010/03/12/opinion/12mann.html?emc=eta1
By RONALD MANN
THE Obama administration introduced a plan this week to encourage defaulting homeowners to sell their houses at a loss, the latest in a long line of reform packages promising to break the logjam of underwater mortgages. But without major changes to the bankruptcy system, such measures won’t aid the American families torn apart by the economic upheavals of the last two years.
To date, our bankruptcy courts have done little to help the millions of people swimming in debt. Almost 5 percent of mortgage loans are now in foreclosure, an increase of more than 85 percent since the beginning of 2008, and more than 10 percent of credit card accounts are delinquent. Yet bankruptcy filings for the first two months of this year are only 1.5 times what they were two years ago. And even after that increase, current filing levels are far below those in the first half of this decade.
The problem is that our bankruptcy system is too difficult and expensive for the people who use it. The system has always been complicated, but in 2005 Congress made things worse by changing the rules to make it harder for bankrupt people to avoid paying their outstanding bills. Now that the recession has exposed the flaws of the system, Congress should go back to the drawing board and drastically simplify the bankruptcy system.
At the heart of the existing process is a strategic choice between liquidation under Chapter 7 or rehabilitation under Chapter 13. Under Chapter 7, households give up all of their nonessential assets (as determined by the law of the state where they live), but pay nothing out of any future income to clear their debts; those debts are simply erased. Under Chapter 13, households make payments out of future income, but are more likely to retain their homes and automobiles.
The 2005 reforms, driven by an exaggerated concern that debtors might game the system, instituted a series of paper-intensive procedural safeguards. All debtors must produce documents that estimate potential increases in expenses or income during the year to come, a monthly net income statement and a complex “means test calculation” that certifies expenditures in a large number of specific, carefully defined categories.
The result is a lawyer- and paperwork-centered system in which the families most in need of quick relief wait months to save up for the filing costs and attorneys’ fees necessary to file a bankruptcy petition. Although total expenses vary a great deal, the statutory filing fees are now almost $300 and lawyer’s fees alone average more than $1,000.
Congress’s 2005 reforms also directly discouraged filings under Chapter 7 (the option typically used by people with few assets) and encouraged filings under Chapter 13 (the traditional procedure for homeowners).
If the bankruptcy system was doing its job, the mortgage-driven financial crisis should then have led to a sharp increase in filings under Chapter 13. Homeowners unable to keep up with their mortgages should have been able to file for relief under Chapter 13, resolve their problems and move on with their lives. Yet the share of Chapter 13 filings fell in 2009 to only 28 percent of all filings, from 42 percent in 2006.
That’s another perverse result of the 2005 reforms: Chapter 13 does not let people avert foreclosure by paying the actual value of their homes, even when their bubble-era mortgages far exceed realistic market prices. In fact, a “special rule” for home mortgages allows lenders to prevent normal bankruptcy relief for borrowers. Thus, the reforms created a system that makes it harder to file for Chapter 7 while doing nothing to make Chapter 13, once the savior of homeowners, useful in this sort of mortgage crisis.
Continue
http://www.nytimes.com/2010/03/12/opinion/12mann.html?emc=eta1