In Springfield, attorney Eugene Berman, who heads up a team of lawyers offering free or low-cost help to people facing foreclosure (to reach them, call 413-322-7404), recently told the Advocate that another wave of catastrophe is building for next year because many people are expected to default on credit cards. Before that storm breaks, it's worth looking at why the credit card defaults will bring on more foreclosures.
When the bankruptcy law was rewritten in 2005—written by the credit card companies themselves—the old law, which allowed people filing for bankruptcy to give their mortgageholders precedence over their other creditors as they paid off what debt they could, was changed. That process had let filers pay off their mortgages first, partly so they would have a place to live.
But now credit card debt, aggravated by the industry's extremely high fees, competes with the mortgage debt of people filing for bankruptcy. So in effect the credit card companies are vying for money with banks and other institutions that issue home loans.
The result? According to an estimate by the New York Federal Reserve Bank last month, that change is causing 32,000 more foreclosures every three months than there would have been under the older bankruptcy process.
"Our specific argument," wrote NYFRB researchers, "is that the bankruptcy abuse reform (BAR) contributed to the surge in subprime foreclosures by shifting risk from credit card lenders to mortgage lenders. Before BAR, any household could file Ch. 7 bankruptcy and have credit cards and other unsecured debts discharged. Sidestepping unsecured debts left more income to pay the mortgage…"
So, the researchers concluded, "cash-constrained mortgagors who might have saved their homes by filing Ch. 7 are more likely to face foreclosure."
"The estimated impact of BAR on subprime foreclosures," the New York Fed found, "is substantial. [It] translates to just over 32,000 more subprime foreclosures nationwide per quarter due to BAR."
