This Bloomberg article notes that banks and other lenders who pushed for reform of the consumer bankruptcy system are now stuck with some unintended consequences in the subprime mortgage market. It seems that many mortgage borrowers who can’t afford their loans are willing to lose their homes but not give up their credit cards. That indeed does seem to be the case, according to many lenders. But the article goes on to blame bankruptcy reform for some of the subprime problem. That seems a stretch.
Before the consumer bankruptcy reforms, people contemplating bankruptcy were able to load up their credit cards with debt, then declare Chapter 7 bankruptcy and have those debts wiped out. Now, many of those debtors with good incomes can’t do that; they have to opt for Chapter 13, where they pay off the debts at a discount over 5 years.
Seems to me, that if borrowers could still load up their credit cards before declaring bankruptcy, then somebody with a subprime mortgage they couldn’t pay would have maxed out on the credit cards. If that person then declared Chapter 13, he might pay as low as 10 cents on the dollar depending on the bankruptcy court. Then there would be not only a subprime meltdown, but a credit card one.
Somebody else may have some insights on this?