… that the road to hell is paved with good intentions and that the law of unintended consequences always applies.
April 20, 2005, President George W. Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act, which reformed the rules overseeing bankruptcy , especially personal bankruptcy.
At its inception , the nation had to borrow heavily from England , and thus the protection of debtors was in the national interest.
The debate over the 2005 reform was completely dominated by the credit lobby and organized by the National Consumer Bankruptcy Coalition . In the words of one legal scholar : “ Never before in our history has such a well – organized , well – orchestrated , and well – financed campaign been run to change the balance of power between creditors and debtors.”
In the pre-bankruptcy – reform world , distressed homeowners would have filed for personal bankruptcy , which would have allowed them to discharge their credit – card debt , making it easier to hold on to their houses. Under the new law , this option was no longer open . According to calculations based on a recent study, the 2005 reform increased the number of people defaulting on their mortgages by almost half a million; and when a mortgage holder defaults and the house is auctioned off , on average it loses 27 percent in value. If we apply this loss to the average price of a house sold in 2005 ( $ 290,000 ), we can estimate that the financial industry lost $ 39 billion as a result of bankruptcy reform.
Source: Zingales, Luigi. A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (p. 68). Basic Books. Kindle Edition.