Obama Plan is No Alternative to Bankruptcy

Bankruptcy is rough, emotionally as well as financially. Yet it is there because the alternative, the debt, the creditors, the foreclosure, and the stress, is worse. Experienced legal professionals understand this and try to make things as easy on the person going bankrupt as possible, but 2005 the congress made it that much harder.

Yet in 2005 there wasn’t a financially crippling economy with over 300,000 foreclosures across the country every month. In 2005 there was the false impression by the federal legislative body that bankruptcies were the favored cop-out of the habitually debt inept. Riding on that notion they made it harder for the normal consumer to file either chapter 7 or chapter 13 bankruptcies, but especially chapter 7.

What they didn’t take into account was that the vast majority of defaulted debt in the United States was done by large corporations, which had no change in regulation. This point though is for another article. Let’s focus on consumer bankruptcy and the foreclosure market in a horrid economy.

The Differences and Obstacles of Bankruptcies

In an economic crisis such as the one we are in one would think that many people would turn to bankruptcy protection for piece of mind and relief, but the opposite is true. Many are choosing to allow the bank to foreclose on their houses and the collectors to go unpaid. To understand this one must know the differences in bankruptcies.

There are two kinds of consumer bankruptcies, chapter 13 and chapter 7.

Chapter 13 Bankruptcy –This is where there is an agreement made to pay off debts with future earnings on a schedule. Chapter 13 is most favored by homeowners because they are less likely to lose their home or other assets in the process.

Chapter 7 Bankruptcy – This is where all of the debtor’s assets are compiled and used to pay off as much debt as possible. The debtor then walks away to start again. Chapter 7 is most favored by non-homeowners because generally they have few assets to begin with.

Many borrowers have to wait to save the fees required to start a bankruptcy. This can be tough when they have no job. Also time becomes a factor as their home slips into foreclosure. The problem is that the 2005 changes to consumer bankruptcy doesn’t allow consumers to save their homes like the rules used to. So many (if not most) debtors are choosing to allow their homes to go back to the bank. What’s the point of bankruptcy if you’re going to lose your largest asset anyway, right?

Obama and the Short Sale

So consumers are now seeing foreclosures as not only a viable option, but their only option. The chart below from the Center for Responsible Lending shows the demonstrative differences in people’s choices.

You may be asking why consumers aren’t working with their lenders for loan modifications and payments plans instead of foreclosure. The reason is because their lenders aren’t working with them. The rules are so restrictive and the housing market is such that people owe more than their home is worth. Many times they have two mortgages and even though the first lien holder may be cooperative the second lien holder is not.

The reasons stack against the consumer the farther one looks down the socio-economic scale. Their home may not appraise for enough, their debt to income ratio may be too high, lenders don’t lend to unemployed people, and so on.

This is where the Obama Administration stepped in this week. They have begun a program that is slated to take effect April 5^th. It will offer incentives to buyers, bankers, and sellers to sit down and work out what’s called a “short sale”.

Short Sale – A short sale is where a bank agrees to allow a person to sell their home for what a buyer offers (almost always considerably less) in lieu of foreclosure if they are the first interested buyer in a long period of time. The bank takes what ever comes out of the sale and the owner walks away without a foreclosure on their credit.

The problem is, banks don’t like short sales, but in the end it’s usually more than they’re going to get out of the house anyway after foreclosure, but they’re so used to the foreclosure process that they prefer it. It’s a matter of familiarity.

Bankruptcy Planning

The Obama’s short sell program offers bankers and buyers $1000 to sit down at the table and sellers $1500 as an added bonus. But either way, short sales and foreclosures aren’t the end of the battle. It is important to keep in mind that there is still debt and transitional measures you can do to ease your burden such as filing for bankruptcy.

Your debt load doesn’t have to hamper your future. Just like bankruptcy isn’t a magic wand, foreclosure or short sales certainly aren’t either. But to combine all of your options into a viable plan that is right for you is the key to making things smoother and easier, and the best way for you to transition into a financially stable future.

Call Phillips Webster today to review your bankruptcy options.

Learn More About:

• Chapter 13 Bankruptcy
• Chapter 7 Bankruptcy
• Bankruptcy Lawyer