Is Filing for Bankruptcy to Avoid Foreclosure Effective?
As frightening as the word ‘bankruptcy’ is for most people, it’s essentially a practical concept. “Bankruptcy is part of the legal mechanisms both to help markets function but also to allow a kind of economic mobility, so that debtors aren’t permanently marginalized and excluded,” says CUNY School of Law Professor Alan White. Filing for Chapter 13 of the Bankruptcy Code becomes especially useful for homeowners facing foreclosure because it halts those proceedings while debtors successfully complete a repayment plan spanning three to five years.
Yet, during the 2008 recession, wherein millions of homeowners faced foreclosure, only a fraction sought bankruptcy. For example, of the 2.5 million residential foreclosures that banks initiated in 2010, only 500,000 homeowners filed for Chapter 13. And not every homeowner successfully avoided foreclosure. White analyzes bankruptcy’s efficacy in his new article, “Does Bankruptcy Save Homes?” published in American Bankruptcy Law Journal.
White reviewed a sampling of nearly 750 homeowner bankruptcy cases filed between 2011 and 2012. Time and again, the data showed that the system meant to forestall foreclosure did not help to do so. Oftentimes, debtors did not establish a repayment plan in the time allotted them, or did not establish a reasonable repayment plan that they could complete.
Beyond that, homeowners seeking to “strip” their second or third mortgages — an action typically taken when a home isn’t worth as much as the first mortgage — found it wasn’t always so cut and dry. Courts differ on the requirements homeowners have to fulfill in order to qualify for stripping. In certain instances, a lawsuit may be necessary, but attorney fees make that option less than desirable.
From his analysis, White concluded with several findings, including improving the credit counseling debtors receive before they proceed with filing for Chapter 13, and informing debtors about other mortgage modification programs that may be available to them outside of Chapter 13 bankruptcy. White told SUM, “Consumer bankruptcy lawyers could make better use of the existing legal tools, but scholars and lawyers should advocate for legal reforms to make the bankruptcy system work better for over indebted homeowners.”