Discussions of bankruptcy law naturally revolve around the relative importance of the rights and obligations of creditors and debtors. Proponents of debtor rights argue the ability of most debtors to repay loans is limited and that a flexible pro-debtor bankruptcy law is needed in order to give debtors a fresh start. Proponents of creditor rights argue debtors can and should repay more of their obligations and that a more stringent pro-creditor bankruptcy code is needed in order to avoid specious applications for bankruptcy from individuals who do not need assistance. There are new players in the bankruptcy law debate with new obligations and priorities. The U.S. government is actively bailing out insolvent lenders and providing direct financial aid to homeowners and lenders who restructure loans to avoid foreclosure. One of the primary objectives of the bailout agency would be to keep the costs of the bailout to U.S. taxpayers as low as possible. The prevention of foreclosures in bankruptcy through the bankruptcy process is potentially a low cost way to reduce foreclosures. Foreclosure reduction is an important component of the current relief effort because reductions in foreclosures can reduce slippage in housing prices which leads to even more foreclosures and even more financial institution losses. Some revisions to the bankruptcy code could reduce foreclosures at a relatively low cost to the creditor financial institutions and the government agency providing taxpayer fund to the financial sector. This note explores how some potential modifications of the bankruptcy code could reduce the costs of the ongoing financial bailout and how this possibility could cause the bailout agency’s view of bankruptcy reform to diverge from the interests of creditors and debtors.
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