From the Wall Street Journal:
More Debtors Use Bankruptcy To Keep Homes
Chapter 13 Filings Gain In Popularity Because They Halt Foreclosures
By AMY MERRICK
October 23, 2007; Page A1
With loan defaults rising along with many mortgage payments, fast-growing numbers of homeowners are gambling on bankruptcy filings to try to stay in their homes.
Last month, as the nation’s housing slump continued, consumer bankruptcy filings increased almost 23% from a year earlier — representing nearly 69,000 people — according to the American Bankruptcy Institute, a nonprofit research group whose members include bankruptcy attorneys, judges and lenders. Overall, consumer bankruptcy filings were up 44.76% during the first nine months of this year.
In some areas where the real-estate boom was especially heated, the increase in filings has been even sharper — especially for a type of bankruptcy that allows homeowners to halt foreclosures on their homes.
The surge in filings hasn’t caught up with the flood of bankruptcy cases consumers launched in 2005, as they raced to beat a change in federal law that made it harder for individuals to declare bankruptcy. Even so, it shows the rising sense of insecurity many Americans feel as housing values fall, lending standards get tighter and hundreds of thousands of mortgages with low introductory interest rates “reset” to higher rates, boosting the homeowner’s monthly payments.
Most consumers filing for bankruptcy continue to do so under Chapter 7 of the federal Bankruptcy Code. Under that provision, a person must forfeit certain assets — including, in some cases, a portion of home equity. Those assets are sold to pay off debts.
While Chapter 7 filings stop foreclosure proceedings, the break is usually only temporary. As a practical matter, many homeowners who file under Chapter 7 lose their homes.
In recent months, however, an increasing number of homeowners have filed for bankruptcy under Chapter 13, which staves off foreclosure proceedings while the homeowner works out a plan to pay off mortgage debt and other obligations over time — usually three to five years. To qualify, debtors must have a regular income and must stay current on their new bills. About four in 10 filers today are filing under Chapter 13 — up from three in 10 two years ago. The 2005 change in bankruptcy laws was designed in part to shift more filers to Chapter 13, which forgives less debt than Chapter 7.
“It’s a mess,” says William McLeod, a Boston bankruptcy attorney who says he is receiving twice as many calls from debtors as he did a year ago. “This is fed right now by real estate, and what’s been this mortgage frenzy in the last several years.”
Some bankruptcy attorneys are promoting Chapter 13 bankruptcy in press releases and commercials, and are contacting borrowers whose homes are already in the foreclosure process. But it isn’t a strategy that works for everyone. Consumer advocates say the homeowners who are most likely to benefit from Chapter 13 are those facing foreclosure because of a temporary financial setback, but who expect to be able to cover their mortgage payments in the future.
Of course, there are pitfalls. A Chapter 13 filing stays on a person’s credit file for a decade, wreaking havoc on his or her ability to get financing. And the repayment plans leave borrowers with little room for maneuver. Indeed, many Chapter 13 plans fail because of unforeseen problems such as an illness, job loss or expenses for an emergency home repair.