New Bankruptcy Law Ups Real Estate Woes

Legislation & Lobbying

Posted Nov 5, 2007, 11:07 am CDT
By Martha Neil

If you're seeing board-ups or overgrown lawns on some homes in your neighborhood, bankruptcy reform may well be one reason why.

New creditor-friendly bankruptcy provisions enacted in 2005 make it harder for individuals in over their heads to get relief from their credit-card debts. And that, in turn, is making it harder for many struggling homeowners to pay their mortgages and exacerbating the current real estate crisis caused by the subprime mortgage meltdown, according to Business Week.

Meanwhile, another avenue of relief is also cut off, the magazine notes—bankruptcy judges can no longer reduce the principal balance due on a mortgage to an amount that a homeowner can afford.

While legislation has been introduced in Congress to restore that judicial power, for now, at least, the only practical option many who can't pay their mortgages may have is to walk away from their homes. Prior to 2005, "housing-friendly" bankruptcy provisions made it possible for most individuals to to keep their homes, as other property and assets went to pay a fraction of their unsecured debt, such as medical bills and credit-card balances.

"It doesn't matter what you think of the purpose of the new bankruptcy law," says Susan Wachter, a professor at the Wharton School of Business. "The timing is bad."

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