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According to a new study, bankruptcy reform laws have made filing for bankruptcy a more expensive and cumbersome procedure. The study funded by the American Bankruptcy Institute Anthony H.N. Schnelling Endowment Fund and the National Conference of Bankruptcy Judges Endowment for Education found that as a result of bankruptcy reform laws, filing costs have increased for both Chapter 7 and Chapter 13 bankruptcy petitions. The study examined 11,221 Chapter 7 and Chapter 13 consumer bankruptcy filings at random. These findings accounted for about 0.12% of the total consumer bankruptcy filings between 2003 and 2009.

Those bankruptcy reform laws are contained in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The study by the American Bankruptcy Institute found that since those bankruptcy laws went into effect, there has been an increase in debtor attorneys’ fees, filing fees and the debtor education fee. Those increases have been seen for both Chapter 7 and Chapter 13 bankruptcy filings. As a result, California bankruptcy attorneys have found that the bankruptcy filing system has become not just more expensive, but also more complicated to use.

As part of these bankruptcy reform laws, the Bankruptcy Abuse Prevention and Consumer Production Act of 2005 included additional paperwork requirements for debtors. These additional paperwork requirements have meant extra time spent on filings, and a more complex filing procedure. The new requirements have also added to the costs of a bankruptcy filing.
The reform laws also imposed new obligations not just on people filing for bankruptcy but also their attorneys and trustees. These also inflated costs and increased the time required to file for a Chapter 7 or Chapter 13 bankruptcy.

Speculative real estate investors in states like California, who already owned residential properties and took out mortgages to purchase new properties, were responsible in no small measure for the housing bubble and the consequent foreclosure crisis. New research by the Federal Reserve Bank of New York points to the underappreciated role of real estate investors who took advantage of easily available credit to buy residential properties. The role of these speculative real estate investors had not been probed adequately until now.

In states like California, these investors formed a substantial portion of lending activity, and their actions helped push residential property prices up. At one point, the number of these investors was as high as 45%. Between 2004 and 2006, these real estate investors formed a large chunk of mortgage purchases, inflating prices for those who wished to buy homes to live in with their families. As a result, owner-occupants ended up having to spend more to buy residential properties. However, investors were able to benefit from the availability of low and no-down payment mortgages to pick up houses even with these inflated prices.

When house prices began to drop in 2006, many of those speculative investors were also the first to default. Every California foreclosure lawyer knows that owner-occupants are less likely to walk away from a house and apply for a foreclosure, compared to real estate investors who don't live on the property.

The large number of investor mortgage defaults contributed to plummeting housing prices, and vast numbers of foreclosures in California. Many owner occupants found that their homes were worth less than the purchase price, and when the economy tanked, many were unable to meet mortgage payments. This at least partly contributed to the massive foreclosure crisis that affected states like California, Arizona and Nevada the most.

In a victory for California homeowners facing foreclosure, California Attorney General Kamala Harris walked away from settlement talks in September 2011, with Bank of America, JPMorgan Chase, Wells Fargo, and Ally Financial, five of the largest mortgage servicers in the country. “After much consideration, I have concluded that this is not the deal California homeowners have been waiting for,” Harris wrote in a letter to the Associate U.S. Attorney General. “(The) relief contemplated would allow too few California homeowners to stay in their homes.

The talks began following the robo-signing scandal that plagued the mortgage industry with accusations of rubber-stamping when it came to foreclosure paperwork. Over the past 11 months, states have been trying to negotiate a $25 billion settlement that could be passed on to homeowners who have suffered wrongful foreclosures. Some homeowners in California lost their homes despite the promise of loan modifications by lenders who then continued the foreclosure process, often behind the scenes. In other cases, lenders could not prove they had the right to foreclose on a property, yet still evicted the owners.

California carried a lot of clout in these settlement talks because of the sheer numbers of foreclosures hitting homeowners here. New York, another state hit hard by the mortgage meltdown, withdrew from the talks earlier. A big sticking point in the negotiations was the extent to which banks should be released from liability for additional legal claims related to the mortgage crisis if they agreed to the settlement. "It became clear to me that California was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated," said Attorney General Harris.

What does the breakdown of these talks mean to California homeowners? In the short term, there will be no quick relief from improper foreclosure. Longer term, Harris indicated California will act independently towards relief for California homeowners by moving forward with investigations into abusive mortgage practices that fueled the housing crisis. While one avenue of foreclosure relief for California homeowners may have changed, it’s not the end of the road.

If you are a homeowner facing foreclosure or other financial problems, contact us to discuss a solution.