Bankruptcy law changes are needed to help troubled subprime borrowers avoid foreclosure, according to a joint call for Congressional action issued late Thursday by the National Association of Consumer Bankruptcy Attorneys (NACBA), the Consumer Federation of America (CFA) and the Center for Responsible Lending (CRL).
The NACBA also released the findings of a national survey of nearly 650 bankruptcy attorneys that it said found 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.
"The only chance many of these (subprime) borrowers have is through declaring bankruptcy," the consumer groups alleged in their joint statement.
Congress enacted the most sweeping reform of the federal bankruptcy laws over the last 25 years during 2005, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA for short). Now, less than two years after its passage, consumer rights activists are pushing for new changes to the U.S. bankruptcy code -- many of which would undo many of statutes associated with the reform bill.
"Help is urgently needed for hundreds of thousands of American families at risk of losing their homes due to abusive home loans," said Philadelphia bankruptcy attorney and NACBA president Henry Sommer.
"For most of these families, bankruptcy is the only viable option to save their home, and this option will be available only if the Bankruptcy Code is revised to eliminate or limit the provisions that exclude home loans from bankruptcy protection," he said.
"This current exclusion is contrary to sound policy, and operates to disadvantage low wealth and middle income borrowers as compared to debtors with the wealth to own more than one home."
"Modifying the bankruptcy laws to permit the write down of certain toxic mortgages would provide a critical life-line for these at-risk families to hang on to their homes," said Allen Fishbein, director of housing and credit policy of the Consumer Federation of America.