I was reading Adam Levitin’s piece on CNBC on the forces at play that is hanging a giant financial anvil over consumers.
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The Consumer Bankruptcy Reform Act (CBRA) probably has a good chance of being considered because the wave of people about to hit a financial wall is enormous following the pandemic.
Think about this for a moment:
- Somewhere between 18% (Census numbers) and 23% (National Multifamily Housing Council numbers) of renters are delinquent. Most of those are going to face eviction when the covid rent holiday ends.
- Almost 5% of mortgages are more than 90 days past due. Those people that are on some forbearance program with their lender need to read the fine print. Private lenders will have the ability to call the delinquency due when the coronavirus payment holiday expires. That is the third-highest level of delinquencies since 1978.
- Collection efforts blocked by pandemic relief will end, and collection activity will begin with force. Delayed payments are still due.
- Unemployment insurance is not income replacement for lost jobs. Households treading water or spending down limited savings are headed for a cliff.
- Large numbers of people that had a medical issue related to the virus will have explosive bills they will not be able to pay.
- Current bankruptcy repayment plans in a Chapter 13 bankruptcy fail and are unsuccessful. See this study.
I did find it very enlightening that the Texas Law Review study concluded, “The data from this study reveal the serious failures of Chapter 13 bankruptcy. There is no longer a vacuum of knowledge that permits alternative theories to excuse away the realities of Chapter 13 outcomes. Nearly all of the two in three families that file Chapter 13 and later drop out of their repayment plans do so in precarious financial straits.”
It went on to say, “These families still owe their unsecured debts, and they are out of ideas and options. Some families may file another bankruptcy, some may simply avoid collectors for years, and some will simply tumble down the socioeconomic ladder, losing homes, cars, and their aspirations for middle-class prosperity.”
Something should change when dealing with the wave of debtors about to fall off the financial cliff.
The proposed Chapter 10 bankruptcy in the CBRA proposed changes is a reasonable adjustment to bankruptcy.
Unless we allow people to seek and obtain a fresh start under the bankruptcy laws and deal with all debt, including federal and private student loans, we will be left with a tremendous number of people who will be financially walking wounded and eventually be a burden on society.