Bankruptcy Law Forces Consumers Into Foreclosure

After a $25-million lobbying campaign in 2005 by Bank of America, Citigroup, JP Morgan & Chase and Washington Mutual, Congress passed a law forcing people to continue paying their credit card debt even after they file for bankruptcy.  The banks got what they had wanted…and more than they had bargained for.

What wasn’t protected under the new bankruptcy code were mortgage payments. So now, instead of defaulting on their credit cards to keep their house, hundreds of thousands of Americans may be forced into home foreclosure, according to a story by Bloomberg News.

Removing credit cards from bankruptcy protection is causing 32,000 more people to foreclose on their house every quarter than otherwise would have under the current economy, according to a recent report by the Federal Reserve Bank of New York.

For the big banks, the results couldn’t have been more catastrophic. Washington Mutual earned $689 million from its credit card business in the third quarter of 2008, up 8.8 percent from the same period in 2007. Meanwhile, WaMu’s overly-aggressive investments in risky mortgage-backed securities caused it to be seized on Sept. 24 by federal regulators, who immediately chopped up what had been the nation’s largest savings and loan, and sold its best pieces to rival banks.

In 1998, when the nation’s largest banks created the National Consumer Bankruptcy Coalition for the purpose of rewriting the bankruptcy code, they already were earning billions of dollars every year from credit cards. But they wanted more. And in their rush to grab higher credit card fees, banks forgot about their huge investments in mortgages, which already have taken a $40-billion hit during this crisis.

“Be careful what you wish for,” Jay Westbrook, a business law professor at the University of Texas Law School in Austin, told Bloomberg. The big banks “wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures."