How A 2005 Law to Prevent Bankruptcies Led to the 2008 Recession

[CentralMass]

Link to the bill including the roll call vote. https://www.congress.gov/bill/109th-congress/senate-bill/256/text
Of note then Vermont Representative Bernie Sanders voted against the bill

Also of note is that then Professor Elizabeth Warren was one of the bills most vocal opponent's. Here is a link containing her testimony on it
before the Senate Judiciary Committee February 10, 2005 in opposition to the bill. https://www.scribnerbankruptcyblog.com/2011/03/blast-from-the-past-elizabeth-warren-on-bapcpa.shtml

Also of note then Senator Joe Biden voted for and championrd the bill. I'll leave that to google it yourself.

The article and subject matter is wonky. At a very high level the bill made it harder for people of limited neans to file for chapter 7 bankruptcy . It was instrumental in more oeople losing their homes during the subprime loan crisis where as they may have been able to stay in them prior to the bills passing. It also prevents people with crippling student debt to seek relief through bankruptcy.

Link to the article quoted below. https://www.thebalance.com/bankruptcy-abuse-prevention-and-consumer-protection-act-3305555

How the Act Led to the 2008 Recession

"A report by the National Bureau of Economic Research said that the Consumer Protection Act could have helped cause the subprime mortgage crisis and the subsequent Great Recession. How? The law made it difficult to declare bankruptcy.

There are three advantages of bankruptcy. First, those in debt could hold off the collection efforts of creditors. Second, they could have unsecured debts simply written off. Third, they could get their debt reorganized and interest payments reduced on secured loans.

Before the 2005 law, homeowners could declare bankruptcy on their personal debt. It freed up funds to pay their mortgages and save their homes. With bankruptcy ruled out, homeowners were forced to use their home equity to pay bills.

First, homeowners were forced to take equity out of their homes to pay back their debts. Before the Act was passed, the home was protected from creditors, even under bankruptcy. Homeowners could declare bankruptcy on their personal debt, freeing up funds to pay their mortgages and save their homes.

After the Act, people became more desperate to pay bills. Mortgage defaults rose 14 percent. In addition, 200,000 more families lost their homes, each year after the Act was passed.

Second, people became enslaved by the cost of health care. The Bush administration responded to the request of banks who said consumers were abusing bankruptcy to just avoid paying their bills. But medical costs created the most bankruptcies. When the Act prevented bankruptcy, those with chronic illnesses were forced deplete all their assets to pay their medical bills.

That is supported by earlier data. In the three months before the Act was passed, there were 667,431 bankruptcies in the fourth quarter of 2005. This plummeted to 116,771 in the first quarter of 2006. It was just 155,833 in the second quarter.

Despite the law, the 2008 Financial Crisis sent bankruptcies skyrocketing. In the second quarter 2009, 381,073 people were forced into bankruptcy. By then, homeowners could no longer rely on home equity to pay their bills. They lost their home, and still had to declare bankruptcy. Such a dramatic increase in such a short period of time shows how many families folded in the face of unsustainable debt.

Higher bankruptcies couldn't have come at a worse time for the economy. Vendors who no longer received payments eventually went bankrupt themselves. That created more unemployment. Although families who received bankruptcy protection were temporarily saved from crushing debt, it stayed on their credit report for 10 years. That prevented them from buying a house or obtaining credit. Both trends prolonged the housing crisis and recession."