In the early 1990’s investment companies (ex: Goldman Sachs, Lehman Bros, and Bear Sterns) got together with Alan Greenspan (The then Secretary of the Treasury) to find a way to boost the economy. Their aim was to attack the middle and lower-middle classes and loosen the lending guidelines, thereby extending credit to people who actually could not afford to pay these loans back. In short they created four types of loans, SIVA (“Stated Income Verified Assets), SISA (Stated Income Stated Assets), No Document Loans, and NINA (No Income No Asset Loans), or stated income loans. These are what are considered liar loans because they over state your income and assets making it seem like you make more and have more in reserves then you actually do. Soon after “liar loans” they introduced creative financing (ex: neg-am loans, 2/28, 3/27, 3/1, 5/1 arms). The lenders qualify individuals at 100% financing and 100% debt to income ratio.

Now what happens when these loans adjusts? The borrower can not afford the payment and is forced to become behind on their payment. We have all heard from the realtors and loan officers the untruthful sales pitches such as, “Don’t worry we will refinance the loan before the interest rate adjusts.” During this period of time there was a widespread practice of convincing clients to skim through the loan documents and avoid reading the small print of the loan applications. These practices caused many people to be extremely surprised and confused when their credit card interest rate moves from a 4% to a 30%.

Inevitably in 2007, 400 million Mortgage notes came due, and the housing crisis began. Soon after almost every middle banking line filed for Chapter 11 bankruptcy. After this happened all subsequent investors did not want to purchase this supposed A+ paper and the portfolio lenders have to service this junk paper. At this point lending changed entirely not allowing a consumer to qualify solely based on their credit score. Now lending has gone back to its traditional roots of full documentation, making it difficult to qualify to purchase any big ticket item. This is where bankruptcy is a positive solution, eliminating your burden of unsecured debt payments bettering your debt to income ratio and allowing you to regain purchasing power.