Sub-prime Mortgage Crisis & Chapter 13 Filings

In recent months, the amount of foreclosures filed throughout the country has more than doubled from the same time period last year. The reasons for such high percentage of filings are numerous. Primarily, the sub-prime mortgages have landed in the hands of individuals who most likely did not qualify for convention financing. Thus, the interest rates on the loans remain higher than other conforming loans. Additionally, many of the sub-prime loan products involved adjustable rates (ARMS) which typically re-set within the first few years of the loans inception.

As sub-prime loans relate to Chapter 13, the typical scenario is as follows: The homeowner qualifies for the loan without a substantial down payment and without significant income documentation. The monthly payment is a stretch for the homeowner; however, it is temporarily manageable. Depending upon the type of ARM, the loan may reset in one, two or three years. It is at that point in time that the homeowner may not be able to make the new, higher mortgage payment. The homeowner is also unable to refinance the debt on the property since the type of loan products needed to accomplish that task no longer exists. Thus, the homeowner is in quite a tough situation. The current real estate market would make it nearly impossible for the homeowner to sell the property and pay off the mortgage. Chapter 13, known as the home saver case, would not be practicable in the case of adjusting ARMS.

The idea behind Chapter 13 bankruptcy is to allow a homeowner to catch-up on whatever mortgage arrears have arisen in addition to making the current mortgage payment on time. As rates adjust and loans reset, the homeowner simply cannot make the current mortgage payment, let alone a partial payment to catch-up. The situation is basically a doomsday for both the homeowner and the mortgage company. The homeowner was banking on the ability to make the payments and/or refinance the outstanding debt at a later date. The lack of real estate appreciation has led to the inability on the part of the homeowner to do just that.

What we are likely to see is a large number of homes on the market for sale. Many of the borrowers will file for Chapter 7 bankruptcy and not Chapter 13 bankruptcy. I believe that the market will take five to seven years to begin to show some signs of appreciation. It will be interesting to see if Congress amends the bankruptcy code to allow mortgage debts to be adjusted. If not permanently, then for a short time frame of three to five years.

David M. Siegel is the author of Chapter 7 Success: The Complete Guide to Surviving Personal Bankruptcy. He is a member of the American Bankruptcy Institute and currently practices bankruptcy law in Chicago and its surrounding suburbs. Additional information is available at http://www.chapter7success.com .

The Advantages of Chapter 13 Bankruptcy

Chapter 13 bankruptcy is often their best option for debtors who decide to stop collection efforts from their creditors but still want to repay their debts. People who have fallen behind in their mortgage payments often choose this option because it allows them a chance to “catch up” before their home is foreclosed upon. Filing for Chapter 13 will stop the collection efforts of all the creditors that the debtor lists on the petition and it allows them a variety of options for repayment, if they meet the eligibility requirements.

Foreclosures are the biggest reason that most people choose Chapter 13 bankruptcy rather than the more attractive Chapter 7. With Chapter 13, homeowners who face foreclosure proceedings can halt the legal actions by choosing this bankruptcy option.

A court appointed bankruptcy trustee will act on the behalf of the homeowner to make provisions with the mortgage company. The homeowner is then allowed to make their monthly mortgage payments with an extra amount each month until they have caught up on their delinquent payments.

Another thing that Chapter 13 bankruptcy affords to debtors is the opportunity to repay secured debts over a period. Oftentimes, the payment plans reduce the amount of the monthly payment that the debtor was paying. While Chapter 7 is the most popular option in bankruptcy, many people choose Chapter 13 because they feel a moral obligation to repay their debts.

This type of bankruptcy gives them the help that they need to negotiate with their creditors. It also provides some “wiggle room” for repaying debts with a timely schedule. Psychologically, this form of bankruptcy is less detrimental to people’s self-images because they have fulfilled their financial obligations rather than simply having them completely discharged.

Chapter 13 bankruptcy is similar to entering into a debt consolidation loan, which is often an option many people exhaust before having their debts discharged by courts. Both instances involve the debtor giving the monthly payment to an appointed trustee. The trustee then relegates the payments to the creditors according to the agreement.

For purposes of getting a mortgage, many companies view both of these equally. In other words, a debt consolidation loan is the same thing as filing for Chapter 13 bankruptcy in the eyes of many mortgage companies. One advantage of these options is that the debtor does not need to have direct contact with the creditors who can have a significant negative impact on a person’s self-esteem.

Many debtors might choose to file under Chapter 13 bankruptcy because they have loans that required co-signers. With this type of bankruptcy, the third parties are protected from the creditors. This means that the creditors can no longer pursue either party in an attempt to collect the debt. They must deal with the trustee that the court appointed to the particular case if they have any questions or concerns.

Bankruptcy was designed to offer consumers a fresh start after getting into a tough financial situation. Some people, however, prefer to repay their debts due to financial reasons or moral obligations. For these people, the courts offer Chapter 13 bankruptcy as a viable option.

Not only does it require the creditors to stop contacting the debtor, it also protects homes from foreclosures and third parties from legal recourse. Chapter 13 has several advantages for those who are trying to honestly fulfill their obligations.

Mike Selvon is the owner of various niche portals. Our bankruptcy portal is a great resource for more information on the advantages of chapter 13 bankruptcy. While you are there don’t forget to claim your free gift.