According to an August 14, 2008, report by Minnesota Public Radio, DFL Senate candidate Al Franken has brought his concerns about the changes made to the bankruptcy laws in 2005 into the race for the senate seat he is seeking. Franken has stated that he would like to see the repeal of the 2005 Bankruptcy Act, and he is not the only one beginning to take a second look at that legislation. Bankruptcy law issues have also been mentioned in the presidential campaign, as well. Some of this discussion has been inspired by recent studies have revealed that the legislative changes in 2005 may have had some unintended consequences, which may have served to heighten the current troubles in the mortgage industry and housing market.

In 2005, personal bankruptcy laws underwent significant changes, via the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The legislation was presented to the public as a positive for consumers, because lenders would be protected from losses and would pass on those savings to the average person. Furthermore, part of the legislative changes included mandated credit education and counseling for those seeking to file for bankruptcy. The legislation also served to enact a means test, which would determine whether an individual could file under Chapter 7, which can result in a significant portion of debt being cancelled, or would have to go with Chapter 13, which institutes a repayment plan typically lasting from three to five years with a much lower percentage of the debt being forgiven.

Consumers have not, overall, seemed to enjoy the benefits that were said to be associated with the changes in law. Fees, late charges, and other credit costs have continued to rise. The consumer bears additional costs, as well, such as increased lawyer fees, as filing for bankruptcy has become more complex. That the legislation ended up costing the consumer in the end despite assurances to the contrary isn’t really that much of a fiscal or political surprise. However, recent studies of the bankruptcy changes and their overall affects do hold a few surprises when it comes to the current economy as a whole.

According to a report written by Elizabeth Warren, published on July 18, 2008, “a new paper, Bankruptcy Reform and Foreclosure, argues that the 2005 bankruptcy amendments are deepening the mortgage crisis. The article was written by David Bernstein, an economist at the U.S. Treasury who chose to post this analysis as private citizen listing only his home address and home e-mail address. Drawing on data from the Survey of Consumer Finance, he links credit card debt, access to bankruptcy, and mortgage foreclosures.”

With so many people struggling to stay afloat financially under crushing debt burdens, the loss of the ability to file bankruptcy in the ways that were available before the legislative changes may be adding to the flood of foreclosures and the general malaise in the real estate market. Part of those debt burdens directly relate to the increased costs of unsecured credit – credit cards, primarily – which were supposed to be controlled by protecting lenders from so much loss by adjusting the bankruptcy laws. To be fair, however, it should be noted that there are numerous other factors in the economy today, such as increasing food and fuel prices, that are exacerbating the potential ill effects of the 2005 changes.

Some lawmakers think that it would be best to revisit that legislation and make changes, thereby adding protections for consumers. Presidential candidate Barak Obama has pointed out that many people are forced to file bankruptcy by overwhelming medical bills, and would like to see changes that would be more forgiving of debts under such circumstances. Obama has also expressed concern for how the changes in the bankruptcy laws affected senior citizens and people serving in the military, indicating that these are issues that should be better addressed.

The issues at play in the debate over bankruptcy laws and their effects on the economy as a whole are difficult ones indeed. On a certain level, it seems inappropriate to argue that consumers should be protected from having to be responsible for their own consumer debts. After all, bankruptcy protection isn’t a basic, fundamental right and wanting to see money loaned out paid back doesn’t particularly seem abusive on the part of lenders. If the costs and fees associated with the credit that was granted were too high, then perhaps the consumer should have thought twice before availing themselves to the credit that was extended.

Lawmakers may be well-served by considering carefully their desire to further tweak the 2005 bankruptcy law changes. While it may make them look caring and good in the eyes of voters, adjusting or even repealing the 2005 changes may do little to improve the overall economic situation. There are far too many factors at play right now in the economy, many of which – such as the bursting of the housing bubble and the affects of the mortgage and lending meltdown – are simply going to take time to work out. As for the consumer struggling to deal with the broad range of financial challenges faced today, the best advice, law changes or not, is to reduce consumption, pay down debt, and try to get back on track with careful and disciplined budgeting and saving.   

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