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Negative Impact of the Bankruptcy Reform Act-Congress Needs to Fix It’s Mistake

 The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA ) became operative on October 17, 2005. A little more than six months later, the Case-Shiller index of real estate values reached their peak and began a free-fall that hasn’t stopped yet. (http://www.ritholtz.com/blog/wp-content/uploads/2011/04/2011-Case-SHiller-updated.png ) Shortly, real estate will be worth what it was in 1998 and the U.S. will have lost a decade of growth. Many have filed for bankruptcy to get out from under depressed values.

Although neither the media or our government wants to use the word “depression” publicly when referring to the economy, consider the following:

*Foreclosures have increased 14% during the last quarter and the number of pending foreclosures and mortgages in default is staggering.
*Home ownership is falling and is reaching historic lows among segments of the population. Parts of Florida are reaching 20% vacancy and other states are not far behind.

*Last month, the Census reported that the rate of home ownership fell in the past decade by the largest amount since the Great Depression. Meanwhile, millions of Americans have turned to the rental market at a time when little new product is being built, allowing landlords to raise rents. The national rate came in at $1,004 in the third quarter, up from $981 a year earlier, according to Reis Inc.

* It’s estimated that it will take more than 15 years for Freddie Mac to unload it’s REO (Real Estate Owned)  inventory.  These are the properties that Freddie Mac has taken back through foreclosure. http://www.housingwire.com/2011/11/03/freddie-could-take-more-than-a-decade-to-unload-reo-inventory.
*Unemployment is pegged at a stubborn 9%, but that number doesn’t include those who no longer qualify for benefits or college or high school grads who have never been able to find a job. More than 400,000 people lose their job every week. Nor does it account for those that are underemployed, meaning that they are making significantly less at their current job than they were at previous jobs, but took the job nonetheless to have some type of income coming in.

*Municpalities and state governments are running huge deficits as they struggle to maintain social services in the face of declining tax collections. Look at Harrisburg, PA or Jefferson County, Alabama that have filed for bankruptcy.
*Tent cities of the displaced are showing up everywhere. Check the desert outside San Diego, CA or any of the “Occupy Wall Street” or its progeny around the country.
*Meanwhile, the number of people around the country filing for bankruptcy have declined some 15 to 20 percent since the beginning of the year. Why? Because bankruptcy is designed as a safety net to catch you before you hit the ground. You file for bankruptcy to save assets and future income. But when you have neither, why bother to file bankruptcy?

You can almost point to the reforms in bankruptcy that started this ball rolling. It removed the safety valve for overburdened consumers and any incentives for starting a small business that might grow into the next Apple computer.  Instead of Congress focusing their efforts on making changes that may in fact, help their constituents, like rolling back some of the changes enacted to the Bankruptcy Code by BAPCPA or by amending the current Code and allowing Bankruptcy Courts to modify mortgages, they provide us with ineffectual loan modification programs like HAMP and HARP.

Many pundits are now predicting that these protests that are popping up around the country will soon turn violent.  People are frustrated and hopeless, which is not a good combination.  Perhaps some real changes to the Bankruptcy Code that favor the consumer and not the banks would be a start to relieving some of the pressure that many American citizens find themselves under. Let’s hope that Congress wakes up and starts putting more effort into providing the help that the American people need and less effort into their re-election campaigns, otherwise, I’m afraid it’s just going to get uglier.

 

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