Filing Bankruptcy To Avoid Foreclosure
At the moment, bankruptcy judges don't have the power to cram down a primary home loan to a level where a borrower can make the payments.
But that isn't stopping homeowners from filing for bankruptcy to avoid foreclosure.
According to Consumer Credit Counseling Services of Greater Atlanta, one out of every five people going through federally-required pre-bankruptcy counseling cite avoiding foreclosure as their primary motivation for taking this drastic legal step.
In June, the national nonprofit financial counseling agency found that 3,620 individuals, or 21.6 percent of the 16,744 people who received pre-filing bankruptcy counseling planned to file for bankruptcy to avoid foreclosure. The agenty has collected information on the connecion between bankruptcy and foreclosure since April, and the percentage of those who cite foreclosure as the tipping point for filing has remained consistent.
"We will provide pre-filing bankruptcy counseling to more than 200,000 Americans this year," said CCCS of Greater Atlanta spokesperson Scott Scredon in an email. "If one in five are choosing bankruptcy to avoid foreclosure, this is a sizable group."
Indeed. If the ratio holds, upwards of 40,000 individuals will be filing for bankruptcy - putting a 10-year black mark on their credit history - simply to stave off foreclosure.
The real problem is that while bankruptcy proceedings stop any foreclosure proceedings (the bankruptcy proceeding takes legal precedence), it is perhaps only forestalling the inevitable. If a homeowner doesn't earn enough income to make the payments - or earn any income, because of a job loss - then filing for bankruptcy isn't going to solve anything.
What's clear is that more people are filing for bankruptcy in 2009 than in any year save 2005, when the new bankruptcy laws were instituted.
The bottomline issues are jobs and income: If people have jobs, and are bringing in enough income from those jobs, they'll pay their mortgage and all their other bills. If they don't, they won't.
And if it's true that one in five Americans is filing for bankruptcy to prevent foreclosure, having enough income to meet their debt obligations would automatically reduce the foreclosure numbers as well.
Doesn't look like that'll happen soon, however. Not only are we losing 500,000+ jobs per month, those who have jobs are working fewer hours, taking forced, unpaid furloughs, and bringing home less money. According to today's release from the Economics and Statistics Administration, personal income decreased 1.3 percent from May to June.
Of course, the 2 million people who will file for bankruptcy this year live on Main Street - not on Wall Street.
(Full disclosure: I am an unpaid member of an advisory group for CCCS of Greater Atlanta consisting of executives who work in the credit, nonprofit foundation, mortgage and real estate industries. Once a year I share information with CCCS of Greater Atlanta executives about what is I think is happening in the real estate world.)
Read More:
Avoiding Foreclosure One Mortgage Apple Cake at a Time
Foreclosures for Sale - And Plenty of Them
Jobs and Real Estate Still Tied Together
