Letter: Bankruptcy law root cause of crisis
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I have yet to hear anyone get to the root cause of the U.S. economic crisis. The root cause was the passage of the Bankruptcy Reform Act of 2005.
Bankruptcy has long been the pressure relief valve for borrowers, the “integrity” check for the assets on the lenders’ books, and a meaningful restraint against unwise lending practices.
The threat of full personal bankruptcy has traditionally kept a damper on unsecured credit lines and kept lenders from extending credit to high-risk borrowers. With the passage of the Bankruptcy Reform Act of 2005, and its subsequent signing into law, the U.S. Congress and President Bush, for all practical purposes, removed the moderating effects bankruptcy law had on lending practices.
The Bankruptcy Reform Act of 2005 caused lenders — especially unsecured lenders such as credit card companies — to make riskier loans because borrowers would find it more difficult to escape responsibility for the debt.
Even if the borrower became less able to repay his debts, “means testing” required by the act caused many would-be full-bankruptcy (Chapter 7) filers to instead file for reorganization bankruptcy (Chapter 13).
Since, after the act became law, the unsecured lenders felt that the debts were more likely to be repaid (even if at a discounted value), unsecured loans became easier to acquire, and credit limits were raised.
As consumers borrowed more money on credit cards, refinancing of home mortgages to pay down high-interest credit card debt became common practice and was the primary advertising target in the home-mortgage industry.
Rising home values enabled homeowners to borrow even more money against their homes to pay off their high-interest-rate credit card balances. Unfortunately, and significantly because of the security they received from the Bankruptcy Reform Act, credit card companies failed to lower credit limits for borrowers who paid off the earlier balances by taking new and larger mortgages on their homes.
Ultimately, many homeowners could no longer afford their mortgages and have defaulted on them at a record rate. The “housing bubble” would not have burst, but rather deflated, had mortgage defaults not begun occurring at these unprecedented rates.
While there were certainly predatory lending practices in the home mortgage industries, the Bankruptcy Reform Act was the real catalyst for loosened lending practices even at the home mortgage level.
The Bankruptcy Reform Act of 2005 will one day be recognized as the key tool in the largest transfer of wealth from the working-class to the wealthy in United States history, if not world history.
What has embarrassed the banks and other financial institutions is so many who financed this nationwide consumer-spending spree got caught holding the goods — like the last suckers in the world’s largest Ponzi scheme.
Jesse Rothschild
entrepreneur
St. Francisville
Bankruptcy has long been the pressure relief valve for borrowers, the “integrity” check for the assets on the lenders’ books, and a meaningful restraint against unwise lending practices.
The threat of full personal bankruptcy has traditionally kept a damper on unsecured credit lines and kept lenders from extending credit to high-risk borrowers. With the passage of the Bankruptcy Reform Act of 2005, and its subsequent signing into law, the U.S. Congress and President Bush, for all practical purposes, removed the moderating effects bankruptcy law had on lending practices.
The Bankruptcy Reform Act of 2005 caused lenders — especially unsecured lenders such as credit card companies — to make riskier loans because borrowers would find it more difficult to escape responsibility for the debt.
Even if the borrower became less able to repay his debts, “means testing” required by the act caused many would-be full-bankruptcy (Chapter 7) filers to instead file for reorganization bankruptcy (Chapter 13).
Since, after the act became law, the unsecured lenders felt that the debts were more likely to be repaid (even if at a discounted value), unsecured loans became easier to acquire, and credit limits were raised.
As consumers borrowed more money on credit cards, refinancing of home mortgages to pay down high-interest credit card debt became common practice and was the primary advertising target in the home-mortgage industry.
Rising home values enabled homeowners to borrow even more money against their homes to pay off their high-interest-rate credit card balances. Unfortunately, and significantly because of the security they received from the Bankruptcy Reform Act, credit card companies failed to lower credit limits for borrowers who paid off the earlier balances by taking new and larger mortgages on their homes.
Ultimately, many homeowners could no longer afford their mortgages and have defaulted on them at a record rate. The “housing bubble” would not have burst, but rather deflated, had mortgage defaults not begun occurring at these unprecedented rates.
While there were certainly predatory lending practices in the home mortgage industries, the Bankruptcy Reform Act was the real catalyst for loosened lending practices even at the home mortgage level.
The Bankruptcy Reform Act of 2005 will one day be recognized as the key tool in the largest transfer of wealth from the working-class to the wealthy in United States history, if not world history.
What has embarrassed the banks and other financial institutions is so many who financed this nationwide consumer-spending spree got caught holding the goods — like the last suckers in the world’s largest Ponzi scheme.
Jesse Rothschild
entrepreneur
St. Francisville
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