Bankruptcy Filings Rise as Congress Mulls Mortgage Reform

October consumer bankruptcy filings increased to 75,975, the highest monthly total since the new bankruptcy law took effect two years ago, according to the American Bankruptcy Institute, a figure that ABI officials expect to go higher if pending legislation passes.

Data from the National Bankruptcy Research Center also showed that the October consumer filings represented a 10.2 percent increase from the 68,926 filings in September. Chapter 13 filings constituted nearly 39.5 percent of all consumer cases in October.

The percentage of chapter 13 filings may increase further if proposed home mortgage modification legislation passes Congress.

The legislation, the Mortgage Reform and Anti-Predatory Lending Act of 2007, sponsored by Democrat Reps. Brad Miller of North Carolina and Linda Sanchez of California is aimed at curbing predatory lending, which bill sponsors say has been a major factor in the highest home foreclosure rate in the nation in at least 25 years.

The sponsors say that the legislation will ensure that lenders will be responsible for underwriting loans that consumers have a reasonable ability to repay while prohibiting practices that increase the risk of foreclosure for consumers.

Financial experts at a House hearing last week testified that using the bankruptcy legislation to write down mortgages could avert 500,000 foreclosures.

The bill also gives borrowers greater authority to modify the terms of their mortgage, and to ease certain terms of the loan if he enters chapter 13 bankruptcy. That’s leading some experts to warn the bill could lead to greater number of filings.

“Chapter 13′s could spike to record levels if Congress enacts pending legislation to allow homeowners to rewrite their mortgages by filing for bankruptcy,” said ABI Executive Director Samuel J. Gerdano in a statement.

The bill also mandates that all mortgage lenders are licensed and registered under state or federal law. The legislation protects consumers from being steered into loans that aren’t in their best interest, and if they refinance there must be a tangible benefit to the consumer, according to proponents.