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Research: bankruptcy reform may have increased US foreclosures

Recent research suggests that the sweeping bankruptcy reform laws enacted in 2005 is a factor in the increase in foreclosures across the country. Cincinnati bankruptcy attorneys know that filing for bankruptcy can in many cases allow a distressed homeowner to retain their home.

The recent research, conducted by the Federal Reserve Bank of Philadelphia says that foreclosures began to increase in America in 2005 after the bankruptcy law was changed to include the means test.

The researchers say in a paper, published by the Federal Reserve Bank, say that the change in the bankruptcy law shifted credit risks from unsecured creditors, such as credit card companies, to sub-prime mortgage lenders.

Before the 2005 bankruptcy law reform, more people filed for chapter 7 bankruptcy relief to discharge unsecured debt. The bankruptcy relief provided the bankruptcy filers with more cash flow to better service their mortgage debt. That result is still available for individuals who qualify for chapter 7 bankruptcy under the new means test.

The means test requires certain individuals to seek chapter 13 relief under the changes made in bankruptcy law in 2005. A chapter 13 plan, allows distressed homeowners to create a repayment plan to pay off a portion of unsecured debts, while in many cases, remain current with their mortgage. Mortgage arrearages can also be made up in many cases through a three to five year chapter 13 bankruptcy.

However, the researchers say that the bankruptcy reform increased mortgage defaults by roughly 15 percent, even before the financial meltdown that has gripped the country. The researchers say that homeowners with high incomes or high assets saw the greatest impact from the reform. The researchers say the bankruptcy reform resulted in roughly 200,000 foreclosures each year nationwide.

The number remains small when compared to the overall foreclosure rate that has placed a burden on the overall housing market. An experienced bankruptcy attorney can assist and advise distressed homeowners on what options are available in seeking debt relief.

Source:, "Did Bankruptcy Reform Increase Mortgage Defaults?," Christopher Moore 2 Mar 2011

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