Bankruptcy to Avoid Foreclosure

Much has been written since the crisis began about “walkaways” or “strategic defaulters” — mortgage borrowers who abandon their homes, often because they owe more than the property is worth.

But Consumer Credit Counseling Service of Greater Atlanta Inc., which advises debtors around the country, has begun tracking what could be described as the opposite behavior: people filing for bankruptcy protection so they can keep their homes.

Chapter 13 of the U.S. Bankruptcy Code offers powerful protection against foreclosures: filers get automatic stay on the proceedings. They can keep their homes provided they resume making payments on the mortgage (and eventually repay past-due amounts) while their other debts are restructured.

Of the 50,385 people to whom the Atlanta nonprofit provided pre-filing counseling during the second quarter, about 21% cited avoiding foreclosure as the primary reason for seeking bankruptcy protection.

Consumer Credit Counseling began keeping this data in March, so there is no comparable figure from prior periods. But Doug Erickson, a vice president at the agency, said that historically, 25% to 30% of the people who filed for Chapter 13 did so to protect assets of some kind, and that most of the time that asset was probably the home.

Erickson said he was surprised that the home-saver share of filers was not higher during the period his agency began measuring it.

“We’re going to watch that percentage carefully,” he said. “It will be interesting if it starts to climb.”

The most common condition that forced homeowners to turn to bankruptcy to keep their homes, Erickson said, was that they were “overobligated: they owed too much money” to various creditors. The second most common reason was that their income had been reduced; the third, unemployment.

source: American Banker