From: LongIslandBankruptcyBlog.com

Almost 1 in 4 U.S. homeowners is drowning in mortgage debt. The Wall Street Journal recently reported that the percentage of homeowners who own more on their mortgage than their property is worth recently swelled to 23%, or just over 10.7 million households, according to First American CoreLogic.

Of that number, approximately 5.3 million households hold mortgages that are worth 20%+ than their home’s value. That number will rise in the coming months. The first wave of foreclosures has passed, but sub-prime mortgages involving balloon payments or adjustable rates will trigger another wave when consumers holding such rates fail to qualify for conventional loans.

Americans’ priorities have shifted. While in the past, making a mortgage loan was paramount, TransUnion recently reported that Americans now prioritize car payments and credit card payments above mortgage payments. Lisa Epstein recently reported that consumers recognize the need for a vehicle to get to and from work, while quoting Ezra Becker, Director of Consulting and Strategy for TransUnion, who concluded that “consumers recognize that their credit cards are their primary purchasing vehicles in this economy.” Many Americans attitudes toward home ownership has changed following the housing crisis over the past 2 years, and as a result many have become delinquent on their mortgage loans. For those homeowners who are drowning in mortgage debt and prefer not to go into foreclosure, there is the option of bankruptcy.

Neither does a consumer any favors in terms of saving their credit rating, but bankruptcy does offer some flexibility.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also called straight or total bankruptcy or liquidation, allows debtors to keep certain property that is considered exempt under the U.S. Bankruptcy Code.  It is this type of bankruptcy that may seem most attractive for a homeowner who has large amounts of unsecured debt and is willing to walk away from his/her home.  The downside, here, is that the bankruptcy will remain on your credit history for 10 years, limiting your credit options and indicating the precarious nature of your creditworthiness.

The upside is this:  Chapter 7 bankruptcy will discharge most types of unsecured debt, such as credit cards and installment loans.  Lienable debts, such as real estate mortgages and security interests for car loans, survive the bankruptcy.  So, too, do student loans.  However, the bankruptcy trustee will sell those assets – hence, the term liquidation – to repay creditors and provide you with a fresh start.

Chapter 13 Bankruptcy

Chapter 13, or individual reorganization, has been likened to a payment plan and it is the preferred method for those who do not want to lose their assets.  It remains on your credit history for 7 years, similar to other negative credit items.  If a debtor has a regular income and limited debt, Chapter 13 will allow it to keep property, such as a mortgaged house or car, that the debtor would otherwise might lose. In Chapter 13, the court approves a repayment plan that allows the debtor to pay off a default during a period of three to five years, rather than surrender the property.

The decision to file bankruptcy is serious and should be made with much consideration.  While it might provide a debtor with a life jacket during a crisis, bankruptcy can have consequences for a decade.

Posted by Krystyna on February 1, 2010 at 5:14pm.