Bankruptcy Laws: A Forgotten Factor in the American Economy

Posted by admin on January 26, 2009

Before 2005 homeowners could file bankruptcy without losing their houses, commercial property or their mortgages. This provided protection on two fronts. For the homeowner the protection is obvious, as they got a chance to keep their most valuable asset. And for the banks, there was no harm in losing the mortgage, which meant more income in their pocket.

Well, enter George Bush who cared more about corporate interests than the American people. While on one hand holding back on the intorduction of home information packs, he believed that by changing the bankruptcy law, Americans would be less likely to default on their loans and credit cards. Consequently, on October 17, 2005 a new law was passed that forced homeowners to make a hard choice. If they were to file bankruptcy, they had to lose their house altogether or pay the debt back.

Such an option was absurd to most people. Why would you blacken your credit report with a bankruptcy filing if you’re going to lose your house anyway? It seemed better to just default altogether.

But defaulting on debt lead to another problem– a possible judgment from the creditor. If this happened a debtor could get their wages garnished, which could take money away for more important things, such as their mortgage.

Fast-forward several years later, at the beginning of the economic crisis. Americans no longer had bankruptcy as their safety net, so they had to try and pay their bills on their own. But this didn’t happen. Instead, they receive garnishments, judgments and eventually the dreaded foreclosure.

With that being said I believe restoring bankruptcy to its original state is crucial for helping to revive the American economy. True, bankruptcy is not a cure-all, but it does give Americans a chance to start fresh without losing their homes. And, even more importantly, it stimulates the economy by allowing banks to hold onto their mortgages.