Bankruptcy filings surge as home foreclosures increase
Monday, October 29, 2007
Consumers looking for a way to save their homes from foreclosure are increasingly turning to federal bankruptcy courts for protection. For people who fall behind but can afford their basic mortgage payments, local experts said, the move can make a lot of sense.
But under some scenarios, the experts said, a bankruptcy filing only delays the loss of a home.
About $50 billion in adjustable-rate mortgages are due to reset this month, most to much higher interest rates and a resulting increase in payments, according to HSH Associates, a publisher of mortgage-related information. Bankruptcy filings nationally were 23 percent higher in September than a year ago, according to the American Bankruptcy Institute.
In the Southeast Division of the U.S. Bankruptcy Court for the Eastern District of Missouri, the increase is even greater. In the 16-county area, 103 bankruptcies were filed in September compared to 54 in September 2006.
There are two basic types of bankruptcy filings. Under Chapter 7, debtors seek to liquidate their unsecured debt. Chapter 7 stops foreclosure for a time, but if a homeowner has little equity, the lender is likely to take the property unless the elimination of other debt makes repayment likely.
Under Chapter 13, unsecured debt and missed home payments are lumped together under a plan to make payments over a 36- to 60-month period at an interest rate fixed by the court. As long as regular mortgage payments are continued and the debtor completes the payment plan imposed by the court, the foreclosure can be stopped.
Chapter 13 "sometimes works out," said Paul Berens, a Cape Girardeau lawyer with Bradshaw, Steele, Cochran and Berens. "It is for what you might describe as a hiccup in your economic life."
Berens, a fellow with the American College of Bankruptcy, often represents creditors in bankruptcies. The "hiccup" could be a temporary loss of income, such as when one spouse loses a job and takes longer than expected to find new employment. The key to knowing whether Chapter 13 is the right choice, he said, is finding a lawyer who fully understands the bankruptcy code.
"You need to find a knowledgeable attorney who can do the best for their client," he said. "Sometimes there are real advantages in Chapter 13."
Chapter 13 filings represent 40 percent of bankruptcies nationwide, and 38.3 percent this year in the Eastern District of Missouri. In the Southeast Division, Chapter 13 filings are only 12 percent of this year's total, but that is nearly three times the rate of 2005.
"It is an unbelievable tool that doesn't appear to be much known about down here," said John David Moore, a bankruptcy lawyer with offices in Cape Girardeau and Sikeston, Mo. "It will get you out of debt. It will assist you."
But if the problem is an unaffordable mortgage payment and not a temporary setback that caused missed payments, Chapter 13 may not work, Moore said. "It won't change your mortgage rate, but it will assist you if you are behind. You still have to deal with the adjustable rate."
Congress rewrote the bankruptcy code in 2005. Under the new rules, a family with income above the median for their state must use Chapter 13 unless their debt load is unbearable. In Missouri, the threshold is $63,274 a year for a family of four and $36,702 for a single person.
For someone who is current on their mortgage, Chapter 7 can eliminate unsecured debt, or Chapter 13 can set up a repayment plan.
But in Chapter 7, the more equity a person has in their home, the greater the danger they will lose it to generate cash to distribute to creditors. Under the law, if a home is sold and the sale price covers the debt, the homeowner keeps $15,000 and the rest is split among the creditors, Berens said.
335-6611, extension 126
The federal bankruptcy code enacted in 2005 made it more difficult for higher-income borrowers to eliminate their debt through liquidation under Chapter 7 and dramatically cut the number of bankruptcy filings.
The recent rise in home foreclosures is pushing borrowers back into bankruptcy court nationally, with many using Chapter 13, which halts foreclosure proceedings and gives borrowers up to five years to make up for missed mortgage payments.
The national trend holds true for the 16-county Southeast Division of the Eastern District of Missouri, where filings this year already exceed those from 2006 and the rate of Chapter 13 filings is nearly triple that of 2005.
Chapter 13 filings: 141
All filings: 3,361
Chapter 13 rate: 4.1 percent
Chapter 13 filings: 111
All filings: 736
Chapter 13 rate: 15.1 percent
2007 to date
Chapter 13 filings: 97
All filings: 757
Chapter 13 rate: 12 percent
U.S. Bankruptcy Court,
Eastern District of Missouri