Wednesday, March 12, 2008

Many more going bankrupt

Many more going bankrupt

Rise in state filings tied to housing crisis

Bankruptcy filings have surged 22 percent in Massachusetts this year, as more people are unable to afford their rising mortgage payments or refinance their homes to pay bills, according to court filings and bankruptcy attorneys.

Massachusetts filings in US Bankruptcy Court increased to 2,493 between Jan. 1 and March 5, from 2,039 during the same period a year ago. Filings were also up sharply for all of 2007 compared with the previous year, despite a 2005 law change that was intended to reduce the number of bankruptcies.

Lawyers, trustees, and other bankruptcy specialists said the housing crisis is the single biggest reason that personal bankruptcy filings are rising rapidly. They said homeowners with subprime and adjustable-rate mortgages who cannot make their higher payments are resorting to bankruptcy. A decline in housing values has also limited the financial flexibility of homeowners who once were able to tap their home equity to pay off car loans or mounting credit card bills.

"People can't keep their houses because they can't afford the monthly mortgage payments, they can't refinance because there's no equity in the house, and they don't qualify for a loan," said attorney David Madoff, a US Bankruptcy Court trustee in Boston who oversees some 600 cases a year. "More and more people are coming up in front of me and saying, 'I'm surrendering my house to the bank.' "

Homeowners facing foreclosure are filing for bankruptcy protection, known as Chapter 13, because the process freezes a foreclosure proceeding, giving them a chance to save their homes by negotiating mortgage payments with their lender. If an affordable payment plan can be worked out, the borrower resumes paying the mortgage after emerging from bankruptcy. Homeowners who are able to keep their homes under Chapter 13 can protect any equity they have in the home.

People sinking in both mortgage and credit card debt tend to file Chapter 7 bankruptcy, which means they agree to liquidate their assets to pay off their debts. This process allows people who are deep in debt to simply walk away from large credit card bills or abandon a house in foreclosure.

Michael Feinman, a bankruptcy lawyer in Andover, said the sluggish economy and fear of job loss are pushing more indebted homeowners into the courts. "In a good economy, bankruptcy is a last alternative. In an economy like we have now, it's often the only alternative," he said.

A flood of interest rate resets on adjustable mortgages triggered a record number of foreclosure filings by lenders against the state's homeowners last year. Lenders also seized 7,653 homes from Massachusetts borrowers - more than double 2006 seizures.

Nathan Maingi filed for Chapter 13 bankruptcy protection last year to try to save his two-story house in Gardner. A recent immigrant from Kenya, Maingi fell behind after a divorce. To comply with a court order to remove his ex-wife from ownership of their home, he refinanced their fixed-rate mortgage into a subprime mortgage that he later learned he could not afford.

His monthly payments rose, eventually hitting $2,600, compared with $1,200 on the original, fixed-rate loan. He was also laid off from his state government job.

Maingi tried to sell the house but failed and eventually converted his filing to a Chapter 7 to liquidate his assets. He abandoned the house and moved to St. Petersburg, Fla. "I really did not want to go into bankruptcy, but it was like sliding downhill, and I couldn't stop myself," Maingi said.

In Massachusetts, lenders are free to seize a borrower's home without court approval, said Nadine Cohen, senior lawyer for Greater Boston Legal Services. Chapter 13 is particularly appealing in Massachusetts because bankruptcy is a refuge for homeowners seeking leverage in dealing with their lenders, she said.

"We will get calls from people who have foreclosure sales scheduled for the next day, the next week. The only thing we can tell them is that if they're eligible to file for bankruptcy, they should consider that as a way to stop the foreclosure," Cohen said.

The bankruptcy courts are undergoing a period of adjustment after a 2005 law change, which made it more difficult and expensive to file. In anticipation of the change, which became effective in October 2005, individuals rushed to file bankruptcy nationwide. Massachusetts bankruptcy filings surged to 26,714 in 2005, according to US Bankruptcy Court. Prior to the law change, filings averaged fewer than 18,000 per year.

In the aftermath of the 2005 rush, there were far fewer filings in 2006. The number of filings accelerated in 2007, to 13,255, translating to a 65 percent increase over the previous year.

A breakdown of individual and business filings was not available for 2007, but most are individual filings, with a few hundred submitted each year by companies. Chapter 7 filings increased by 63 percent to 8,843 in 2007, while Chapter 13 filings rose 70 percent to 4,280 filings.

With house values still in decline, said Jack Williams, a scholar at the American Bankruptcy Institute, bankruptcy courts will be busy again in 2008.

"It's going to be a lot worse before it gets any better," he said.

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