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Bankruptcy Reform on the Agenda

Bankruptcy Reform Backfires on Banks

According to a Bloomberg article on November 8, 2007, the bankruptcy reform lobbied for in 2005 by a group of banks, may be contributing significantly to the rapid increase in foreclosures.  Bloomberg’s contention is that since it’s now much harder to discharge credit card debt, strapped consumers are instead walking away from their houses.

Banks had invested seven years and millions of dollars lobbying for the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005”.  I’m not sure who named this law, because it did very little to protect consumers from abusive lending practices.  It should have been more accurately called the “Bank Profits Protection Act”.

So, it is with great irony and a little overdue karma that banks have recently lost billions in foreclosure-related charges.  It would be difficult to calculate the percentage of foreclosures that were caused by bankruptcy reforms.  But, even a small percent of the current foreclosures would represent a very large loss of billions to the lending institutions.

The Plight of the Consumer

Bitter and vocal consumers, who are trapped in debt and losing their homes have been quick to point out that banks and lenders share the blame for their fate.  Long considered to be “irresponsible” for their excessive debt, borrowers are finally making the point that abusive lending practices and inadequate consumer protection are equally to blame.

Our Tax Dollars at Work

With a pivotal election ahead in 2008, politicians can’t afford to ignore angry voters for the sake of receiving campaign contributions from banks.  This could become a key issue in states with high foreclosure rates.  California Governor Arnold Schwarzenegger has already negotiated a deal with four banks to ease loan terms for distressed borrowers and now he is working with the borrowers in order to help them keep their homes.  Expect other politicians to quickly follow suit with mortgage relief plans and legislation.

Another bright development is that Senator Christopher Dodd, the powerful Chairman of the Senate Banking Committee, has stated that he will introduce a bankruptcy reform bill that will give relief to individuals struggling with mortgage, medical and student loan debt.

Senator Dodd said, “Our bankruptcy laws should not punish these vulnerable members of our society, but instead should help them get back on their feet while protecting them and their families from added suffering at the hands of creditors”.  I tend to agree with that.

The Benefit to Consumers

So, a positive benefit of the subprime crisis, is that our Government is finally considering the lender’s effect on the plight of the consumer.  And, banks, lenders and mortgage companies have no choice but to look into the mirror and accept some responsibility for their own plight.

Let’s hope that everyone remembers these lessons, so we don’t have another repeat in 20 years.  It’s a forgotten era, but I seem to remember this happening back in the ’80s.

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