Almost 30 years have passed since the Bankruptcy Reform Act of 1978, a time when mortgages typically had a fixed-rate and unchanging monthly costs. Back then — and until 2005 — if you ran into financial trouble bankruptcy provided a way out and a fresh start.
But in 2005 declaring bankruptcy — something that was never simple, easy or pleasant to begin with — became far tougher. Under the Bankruptcy Abuse Prevention and Consumer Protection Act creditors suddenly had new protections — and borrowers didn't.
What changed? Effective October 17, 2005 most student loans can no longer be discharged. If your income exceeds the state medium you can be forced to file under Chapter 13 (a repayment program) and not Chapter 7 (a discharge and forgiveness plan). Credit debt is not forgiven if you spend at least $500 in the 60 days prior to seeking bankruptcy protection -- say a cash advance to pay off a looming mortgage payment.
Perhaps most importantly for mortgage borrowers, the 2005 legislation says homeowners must obtain credit counseling and develop a budget analysis in the 180-day period before filing for bankruptcy.
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