For years, cash-strapped individuals who sought to keep their homes by filing for bankruptcy blamed a handful of causes: heavy credit card debt, loss of a job, hefty medical bills.
Add one more to that list: higher-than-expected mortgage payments. And it already is contributing to higher bankruptcy numbers.
For the first two months of this year, the number of Hampton Roads individuals trying to hold onto a home or other major asset by means of a Chapter 13 bankruptcy jumped 84 percent to 373 from slightly more than 200 for the same period last year, according to the U.S. Bankruptcy Court's Eastern District of Virginia.
Chapter 13 of the bankruptcy code enables individuals to hold onto a home by devising a repayment plan under the court's supervision and repaying what they owe over a five-year period. Another part of the bankruptcy code, Chapter 7, allows individuals to wipe out most of what they owe but usually requires that they liquidate major assets such as homes.
Jim Pedigo, a Norfolk bankruptcy attorney, said some clients have come to him after having their adjustable-rate mortgages reset at much higher rates. Even though interest rates have moderated, these homeowners had difficulty catching up with their monthly payments once they fell behind, Pedigo said.
Jeffrey Flax, another Norfolk attorney who handles personal bankruptcies, witnessed an increasing number of homeowners squeezed by rising costs while their incomes failed to kept pace.
"Some people got into houses they really couldn't afford," Flax said. "Home values have gone down, rather than up," and these homeowners "are stuck."
The number of personal bankruptcies in Hampton Roads due to mortgage-related difficulties will continue to climb, Larry Filer, an associate professor of economics at Old Dominion University, predicted. That's because a significant number of the nation's subprime adjustable-rate mortgages will reprice at higher rates in April, said Filer, who has been studying personal bankruptcies for the past decade.
By historic measures, the volume of Chapter 13 bankruptcies filed in Hampton Roads remains modest. An abundance of credit earlier in the decade enabled many financially troubled homeowners to avoid bankruptcy by refinancing or taking out a second mortgage.
By 2006, the number of Chapter 13 filings in the region fell to slightly more than 1,000 from 4,153 three years earlier. That downturn ended abruptly last year as the availability of financing for individuals with tarnished credit evaporated. The volume of Chapter 13's jumped almost 60 percent during 2007 to more than 1,700.
Bankruptcy attorneys blame a weaker economy for part of the local rise. Although Hampton Roads' unemployment rate of 4.1 percent in January remained well below the 5.4 percent rate nationwide, many individuals involved in real estate-related jobs are working fewer hours or have taken jobs that pay much less than what they once earned, Pedigo said.
As a percentage of consumer bankruptcies filed in January and February, Chapter 13's jumped to 41 percent from a 33 percent share in the same two months of 2007. Chapter 7 filings accounted for the remainder.
Still, resorting to a Chapter 13 filing hasn't alleviated the financial pressures on many cash-strapped homeowners. That's because their homes may be worth much less than what the owners still owe on their mortgages.
For a Chapter 13 bankruptcy to work, homeowners "still have to have the income to make their mortgage payments going forward and to fund a repayment plan," Flax said.
Concerns about the nationwide surge in foreclosures have spurred proposals in Congress that would give bankruptcy judges additional powers in Chapter 13 cases. The Foreclosure Prevention Act of 2008 in the Senate and the Emergency Home Ownership and Mortgage Equity Protection Act in the House would allow judges to modify the principal of a mortgage for a primary residence and the mortgage's interest rate, steps that judges now are barred from taking. The opportunities for loan modification would be available only under certain circumstances.
Mortgage lenders, however, are opposed to providing additional powers to bankruptcy judges and argue that mortgage credit would be less available and more expensive under such an approach.
Tom Shean, (757) 446-2379, tom.shean@pilotonline.com
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home owners/banks to blame
Too many people bought homes that were 800,000.00 + and thought in a few years they could sell it before their interest rates went up and make tons of money!! Well greed got them no where! Banks should have never allowed arm loans-rates are too high. A risk they should have never taken.
Personal finance
I suppose it's a good thing that people around here are at least trying to pay their mortgage through chapter 13 verses simply walking away. The whole debacle underscores the failure of parents and schools to educate children about finance and being able to live within their means. But I guess when we have a government that doesn't live within its means without any apparent repercussions, its hard to sell the idea of personal responsibility and accountability - especially when all you have to do is cry loud enough and the government will come to your aid to bail you out of your own stupidity again and again at the expense of responsible citizens.
Oh yea
For all the people who took out bigger loans than they could afford, banking on the fact that the housing values would go up to save them.... I bet if values had gone up they would be quick to brag about how smart they are. The worst part is these stupid programs that presidential candidates keep talking about to "save the homeowners." They are all about saving wall street. "Home owners" (funny term isn't it) who have huge mortgages on houses that are worth much less don't want to be saved, they want to walk away from a bad gamble! I've been harping on this subject since 2005. This was all predictable, anyone who didn't see it in 2004/2005 is an idiot.