FORECLOSURES AND BANKRUPTCY: THE NUMBER OF FILINGS IS TOO LOW, WHAT TO ANTICIPATE?

So if the number of personal bankruptcy filings is down, does that mean we are on the road to economic recovery?  We hear stories frequently of larger businesses like JC Penney and Lord & Taylor filing for bankruptcy relief, but the number of personal and small business bankruptcy filings are actually down during the Coronavirus pandemic. So if large businesses are shutting their doors and laying off thousands of employees, why are we not seeing these hard times trickle down to everyday Americans, in the form of a fresh start via the personal bankruptcy process.

THEORY 1:  “It costs money to file bankruptcy.”

Someone once asked a friend of mine about what I do for a living. After some pause and careful thought, she responded “he provides a $1,000+ service to individuals with no money.”  This is a fair point that demonstrates that it costs money to file bankruptcy.  In the metro Toledo, Ohio bankruptcy lawyer market, the average cost of chapter 7 bankruptcy services averages about $980.00.  Additionally, personal chapter 7 bankruptcy filers are required to pay a court filing fee of $335.00.  Those filing for relief under chapter 13 bankruptcy can expect a greater fee, however most bankruptcy courts will allow a significant portion of the chapter 13 attorney fees to be placed in a repayment plan within the 3-5 year prescribed repayment period.

So how does an individual find enough money to file for bankruptcy relief?  If we owned a crystal ball, we would have already cornered the market on this question.  But we can give some insight as to what we are currently seeing in our bankruptcy law practice.  Money for bankruptcy filings typically does not come from one’s regular paycheck earnings, such as week to week cash flow.  Lump sums are the most common sources, such as tax refunds, stimulus checks, unemployment lump sums, help from a family member or friend, and in some cases a payment plan of some sort can be figured out so that a debtor can stop a wage garnishment and then repay the attorney fees post garnishment.

Now apply the Coronavirus Pandemic.  With all the economic uncertainty and little promise of a stimulus check prior to the November 2020 U.S. Presidential election, many people are holding on to their money and putting bankruptcy filing on hold for just a bit longer.  While the personal bankruptcy relief is desperately needed in many cases, these individuals find themselves having a limited amount of personal funds to cover much broader financial problems.  Don’t be afraid to have an open discussion with your bankruptcy attorney about ways to pay for your bankruptcy.  Experienced bankruptcy attorneys and lawyers have seen this dilemma many times and may be able to offer some valuable insight.

THEORY 2:  “Foreclosures May Be Looming, But Not Yet.”

It’s worth noting that while mortgage default rates have increased in 2020, both new foreclosures and chapter 13 bankruptcy filings have yet to catch up. According to a recent article in Bloomberg Law, mortgage default rates have more than doubled in 2020, rising from 3.2% to 7.6% between January to June 2020.  Meanwhile both new foreclosure case filings and chapter 13 bankruptcy filings are sharply down.  So how do we explain the disconnect?

One of the primary reasons why people file for chapter 13 bankruptcy relief is to stop a foreclosure and save their home.  Debtors under chapter 13 bankruptcy relief are able to spread out their mortgage arrears, along with other personal debts such as credit cards, over a 3-5 year repayment plan.  Chapter 13 debtors are deemed current with their mortgage company upon filing for chapter 13 bankruptcy relief and upon successful completion of their chapter 13 bankruptcy repayment plan, the mortgage arrears should be eliminated.

One possibility for the disconnect between mortgage defaults and new foreclosure filings may be mortgage forbearance programs that are being offered to homeowners.  The COVID-19 pandemic has led to an inability for hundreds of thousands of homeowners to remain current on their mortgage(s).  Job layoffs, decreased hours, and self-quarantines have resulted in substantial mortgage arrears. Mortgage forbearance programs seemed like a great way to avoid foreclosure, but many of these mortgage forbearance programs are about to end.  Were you one of the many homeowners who took advantage of a mortgage forbearance, but didn’t read the repayment rules?  Some mortgage forebearances will allow you to move the missed payments to the end of your loan.  However, many mortgage forebearances require the entire arrears to be repaid at the end of the forbearance period.  If you are like me, I find it hard to save up four mortgage payments, let alone one.  These large demands from the mortgage companies are expected to have an affect on foreclosure filings and chapter 13 bankruptcy filings.

Related Article:  Bloomberg Law; Teadra Pugh; August 31, 2020