When to file Chapter 13 bankruptcy

By: By IRIS TAYLOR | TIMES-DISPATCH COLUMNIST
Published: April 29, 2008

When to file Chapter 13 bankruptcy Consumers can stop a foreclosure in its tracks simply by filing for Chapter 13 bankruptcy.

So why don't more people do it to save their home?

Here's why and whether it's worth doing.

The number of Chapter 13 filings jumped 41 percent last year in the U.S. Bankruptcy Court's Eastern District of Virginia, which includes the Richmond area. The court had 5,808 filings in 2007 compared with 4,113 in 2006. The court does not extrapolate how many are foreclosure-related.

A Chapter 13 filing will definitely stop a foreclosure and enable a consumer to sell the house or repay missed mortgage payments over five years, said Deanna Hathaway, an attorney at Boleman Law Firm PC in Richmond.

But a Chapter 13 filing is not for everyone because:
# It messes up a person's credit life for seven years.

"Three things that are the most negative things you could have on a credit report are a judgment, a tax lien or a bankruptcy," said Maxine Sweet of Experian, a credit reporting agency.

"They are going to cause your credit risk to be viewed very negatively," she said. "When you are high-risk, you're going to have difficulty getting credit, you'll pay more for credit or a bigger down payment."
# It may not make sense to save the house. Say you've defaulted on your payments and your house is in foreclosure. You owe $120,000, but your home is worth only $100,000.

Doug Foley, head of McGuireWoods' restructuring and insolvency unit in Norfolk, asked whether it would it make sense to try to save the home in a bankruptcy and make payments that you cannot afford when you could walk away from it and rent less expensively?

"Banks don't want to foreclose and take in all these houses that are underwater," Foley said.

Instead, many of them are recasting the rates and terms of troubled mortgage loans. That's probably why more consumers aren't filing for bankruptcy.
# The bankruptcy payments may be unaffordable.

You would have to make your regular mortgage payments and also make catch-up payments to the bankruptcy court, said Paula Sherman, lending protection coordinator at Housing Opportunities Made Equal in Richmond.

Would you have enough income going forward to pay, say, an additional $400 a month for five years to catch up the missing mortgage payments? It might trigger a new crisis.

. . .

Consider filing a Chapter 13 if you have equity in your home and a job, but your lender refuses to negotiate a reasonable time period for you to make up the missed payments.

Perhaps you had a medical emergency and didn't get a paycheck for a few months, so you missed payments. Now you're back at work, but you can't catch up the payments, and the lender refuses to work with you.

"If they cannot afford to keep the house because the payments are too high, but they have equity, [the homeowner] will propose a Chapter 13 plan that gives them time to sell the house so they can obtain their equity," said John Ventura, a Texas bankruptcy attorney.

"If they cannot sell it, they would be forced to give it up, but they give it up in satisfaction of the debt," meaning the creditor cannot ask for an amount in excess of what the house is worth.

"If a consumer can afford to make the monthly payments on the house, but they just cannot come up with the missed payments, the court will allow them to start paying their regular monthly payments so they do not get further behind," he said.

. . .

If you're thinking of filing, look into your options.

Some resources: Contact Housing Opportunities Made Equal at (804) 354-0641; NeighborWorks Resource Group at (804) 329-2500; or, ClearPoint Financial Solutions Inc. at (877) 422-9044.

Contact Iris Taylor at (804) 649-6349 or itaylor@timesdispatch.com.