As our economy trudges along, researchers are starting to look back and make sense of it all. One thing we know for sure .. it was the mortgage meltdown that led to this economic crisis. But researchers at the Federal Reserve Bank of New York are now saying that one of the main triggers of the mortgage meltdown was the 2005 bankruptcy reform act. Originally drafted in 1997 and pocket vetoed under President Clinton, it took until 2005 to get the darn thing passed, after years of lobbying from the credit card industry.

Basically, this legislation shifted the burden of risk from credit card lenders to mortgage lenders, which inevitably led to a surge in home foreclosures. You see, before the law was passed, households could erase any unsecured debts by filing for Chapter 7 liquidation. This would give them enough disposable income to use to make mortgage payment. But the new law forced "better-off households" to file Chapter 13 if seeking bankruptcy protection, which would require them to continue paying unsecured lenders.

So people who before could have saved their homes by filing Chapter 7 were now much more likely to face foreclosure because they would be forced to file Chapter 13. The law's original intent seems to be to trap high-income debtors from abusing bankruptcy .. but instead, it hurt "ordinary American families in serious financial distress." Yeah ... it hurt them by forcing them to try to figure out a way to pay their bills. Oh, the humanity!

From my experience practicing law I can tell you that under the old law someone would be allowed to run up $40,000 or more of credit card debt, waltz into bankruptcy court, promise to pay those credit card debts off at 5 cents on the dollar, and a bankruptcy judge would rule that the debtor was making a "good faith effort" to satisfy his obligations. What a joke.

The conclusion from these researches at the Federal Reserve Bank is that the new law increased the number of people who were defaulting on mortgages or just walking away from their homes, rather than seeking bankruptcy protection.

Here's a clearer picture of what was going on. Ten years ago I owned quite a few rental homes. Someone would come along to look at the house. I would tell them the rent was, for example, $1,500 a month and that I required a $500 deposit. They would then tell me that I was out of my mind because they could go down the street and buy pretty much the same house with no money down, no closing costs, and with their adjustable rate mortgage their payments would be lower than what I was asking in rent! So ... I sold my rental homes. Bottom line? Those people who went for their no money down, no closing costs, adjustable rate mortgaged homes were not cut out to be home owners. They were renters, pure and simple. These are the people that defaulted on those loans when the payments started going on ... and here we are today.

Now ... doesn't that make so much more sense than blaming this on bankruptcy courts forcing people to pay their bills? Yeah, I thought so.