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The end of easy bankruptcy relief

New bankruptcy legislation making its way through the US Congress may have unintended consequences that could cause it to backfire on the banking industry.

Reform of bankruptcy legislation in the US has been widely expected and indeed much lobbied for by banks over the past five years. The new bill, which among other measures would have the effect of making personal bankruptcy under Chapter 7 much more difficult, now looks as if it will get through the final obstacles of the Senate. President George W Bush has indicated that he will not veto the bill if it is passed in its present form. However, with a deteriorating economy the proposed changes to the bankruptcy regime may hurt US banks, especially if debtors rush to declare bankruptcy before the laws harden against them.

Historically, the US has always been a comparatively debtor-friendly jurisdiction for individual bankrupts. Far more leniency is typically shown by the courts than would be so for comparable cases in the UK or continental Europe. For example, bankrupt debtors can expect to retain their houses and in many cases their automobiles, and would not typically expect to have a lien placed on wages.

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