Consumer Groups Call for Bankruptcy Reform Amid Subprime Meltdown

Bankruptcy law changes are needed if hundreds of thousands of American families struggling with abusive subprime mortgages are going to escape foreclosure and the loss of up to $164 billion in home-based wealth, according to a joint call for Congressional action issued today by the National Association of Consumer Bankruptcy Attorneys (NACBA), the Consumer Federation of America (CFA) and the Center for Responsible Lending (CRL). NACBA also released the findings of a national survey of nearly 650 bankruptcy attorneys showing a sharp rise
in subprime mortgage-related problems concurrent with controversial 2005 changes to federal bankruptcy laws.

The three consumer groups warned that -- while primarily low-income subprime mortgage borrowers face often insurmountable bankruptcy hurdles to hold onto their homes -- high-income individuals in bankruptcy court get preferential treatment when they seek to save second and third homes.

As the joint statement notes: "The only chance many of these (subprime) borrowers have is through declaring bankruptcy. The problem is that as currently enacted, the Bankruptcy Code favors home mortgage lenders over virtually all other secured and unsecured creditors. The amendment disfavoring protection of the debtor's principal residence was added at a time -- 1978 -- when home mortgages were nearly all fixed-interest rate instruments with low loan-to-value ratios and were rarely themselves the source of a family's financial distress. As a result, bankruptcy law singled out the home mortgage loan as the major debt for which the bankruptcy court is powerless to provide relief. Since that time, the mortgage market has shifted considerably. Subprime lending practices of the last six years, which have relied on property appreciation, and in many cases appraisal fraud, have left many borrowers with mortgages larger than the value of their homes. If the borrowers cannot restructure these debts, then they cannot get back on their feet financially."