In its zeal to protect creditors, the prior Congress passed bankruptcy reform, making it more difficult for consumers to walk away from consumer debt. The old bankruptcy law, which had been in effect since 1978, had been seen by many to be housing friendly. It was a relatively inexpensive means of debt liquidation that offered a greater likelihood that consumers filing for bankruptcy could keep their homes. The new bankruptcy rules limit Chapter 7 filings that allowed cancellation of certain unsecured debts, (such as credit cards), to low-income consumers. All others are now forced to file under Chapter 13, which requires repayment over time of most, if not all of their debt, secured and unsecured. The unintended consequence of this change to the bankruptcy code has been that many consumers, when forced to repay all of their debt, are finding it difficult or impossible to keep up their mortgage payments. In essence, lawmakers have created a situation where, in an effort to protect financial institutions, they passed a law that has contributed to a deepening of the current home mortgage crisis.
Via Business Week