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Law Professor Asks Why More Bankruptcies Have Not Been Filed During Housing Crisis

August 27, 2010

Our Moreno Valley consumer bankruptcy attorneys follow media reports about bankruptcy, of course. Like other observers, we have repeatedly read that the financial crisis has triggered so many bankruptcies that they have set a record for filings after the 2005 bankruptcy reform law. That's why we were very interested to see an Aug.18 post from the Credit Slips blog, which focuses on bankruptcy, credit and consumer finance from the perspectives of nine academics. This post was written by guest contributor Alan White, an associate professor at Valparaiso University School of Law in Indiana who teaches bankruptcy, consumer law and contracts, among other things. He posed a question no mainstream newspaper has asked: Given all their debts and defaults, why haven't more consumers filed for bankruptcy?

According to the post, U.S. households' mortgage debt grew by 300 percent in the 11 years between 1996 and 2007, while median income grew by only 40 percent. Unsecured debts such as credit cards also increased, but less dramatically -- possibly because some people used home equity loans to pay off credit cards. When the mortgage crisis arrived and credit was suddenly unavailable, a lot of those borrowers defaulted on their obligations. Credit card "charge-offs" are at 10 percent, up from 3 to 5 percent, White wrote; combined foreclosures and 90-day delinquencies was nearly 10 percent in the first quarter, up from less than 2 percent in other eras. Meanwhile, the Treasury Department estimates that 1.6 million people are eligible for the federal loan modification program. Yet this year's bankruptcy numbers are on track for only about 400,000 people to file for Chapter 13 bankruptcy, he notes, saying this raises the question of when they will file for bankruptcy.

As Santa Ana personal bankruptcy lawyers, we suspect there's not just one reason why more individuals and couples are not choosing bankruptcy -- there rarely is. But we can think of several reasons, thanks to our experience working with bankrupt people. The sad truth is that Chapter 13 bankruptcy does not help everyone who is trying to keep a home. For one thing, a Chapter 13 bankruptcy will not allow a judge to reduce the principal owed, or "cram down" the loan, on a first home. This makes Chapter 13 less likely to help underwater homeowners. Second, debtors must have a steady income in order to make their payments under Chapter 13, and unemployment is increasingly the driving force in mortgage defaults. Such people might still go into bankruptcy, but the lack of steady income may put them in Chapter 7 instead. Finally, many people feel so strongly that bankruptcy is a moral or personal failing that they are delaying a seemingly inevitable bankruptcy with harmful financial moves like draining their bankruptcy-exempt retirement accounts.

At Howard Law PC, we strongly encourage our clients and potential clients to consider bankruptcy the way they would consider any other financial choice -- as dispassionately and logically as possible. Even if you feel emotionally conflicted about filing for bankruptcy, it may be the best choice for you if you cannot reasonably foresee a time when you will be able to repay your debts. Our Costa Mesa individual bankruptcy attorneys start each new case by helping clients make calculations to determine this, because we know bankruptcy is not always the right choice. When bankruptcy is appropriate, we help our clients navigate the legal and financial disclosure requirements, helping them get into the best possible position to discharge their debts. We also help with related and important matters, like protecting clients from creditors who violate the automatic stay and counseling them on the tax consequences of a bankruptcy.

Howard Law offers free, confidential consultations to all potential clients, so you can talk to us at no further financial obligation. To learn more or set up a meeting, contact us through the Internet or call 1-800-872-5925 today.