A federal court has ruled that consumers who take out a mortgage, car loan, student loan, credit card, or credit card balance in a state that doesn’t allow bankruptcy protection have no right to pursue their debts.
The decision is a blow to those who had hoped the new bankruptcy laws would ease some of the pain caused by the financial crisis, which brought a massive surge in credit card and auto loan defaults.
The ruling also came on the heels of a federal bankruptcy court ruling that overturned the new rules.
In January, a federal judge in Illinois rejected a petition by more than 1,000 people seeking to get bankruptcy protection in the state that allowed the bankruptcies.
The Illinois law, which took effect on January 1, requires a debtor to pay $500,000 to a trustee and has been criticized by some advocates as a way to protect banks from liability for debts that were not originated with the banks.
A federal appeals court earlier this month ruled that Illinois was not exempt from the new laws because it had not passed a law to make it easier for bankruptcies to be filed.
The new bankruptcy law will take effect Jan. 1 in Illinois and New Jersey.
If the ruling is upheld by the U.S. Court of Appeals for the 4th Circuit, it could be a game-changer for millions of Americans, including many who have been saddled with debt.
“The new rules would not have stopped the bankruptcy wave of 2008,” said Brian Cogan, senior attorney for the National Consumer Law Center, which has pushed for changes to the bankruptcy laws.
“But it would have helped those struggling with the effects of the financial collapse.”
The bankruptcy law is expected to take effect in many other states, including Pennsylvania, where a judge last week blocked a similar law from taking effect.