Metro Detroit Foreclosures Skyrocket

I recently read an article in the Detroit Free Press by Frank Witsil, “Number of foreclosures in metro Detroit skyrockets.” The article discusses how a combination of factors including low housing sales, loss of income, and increases in adjustable rate mortgages have created “the perfect storm” and caused the foreclosure rates to increase dramatically.  He also reports that the foreclosure trend is predicted to worsen.

The article goes on to give several tips on avoiding foreclosure, but fails to even mention that Chapter 13 bankruptcy  is a viable (and possibly the best) means to legally stop a foreclosure.  The filing of a Chapter 13 bankruptcyimmediately stops any further collection activity, including a foreclosure sale, and gives qualified homeowners a minimum of three years to repay any mortgage arrears.  I’ve seen many people save their homes by filing a Chapter 13 bankruptcy and have always felt that it’s the cheapest and safest way to avoid a foreclosure sale if your mortgage company refuses to work with you.

If you are living in Detroit and are facing a foreclosure, you can learn more about Bankruptcy Laws in Michigan and complete a free legal evaluation form to talk to a Detroit bankruptcy attorney about how a Chapter 13 bankruptcy might help save your home from foreclosure.

Getting a Mortgage After Filing Bankruptcy

Many Americans fear they won’t be able to ever get a mortgage if they file bankruptcy. Others are under the mistaken impression that it would take them seven to ten years to qualify for a mortgage after filing bankruptcy. While this may have been true 20-30 years ago, nowadays this is no longer the case. Today, more mortgage lenders than ever are willing to work with people who have fallen on hard times or filed for bankruptcy. In fact, buying a home after bankruptcy can be a great way to rebuild your credit.

After your bankruptcy discharge but before you start house-hunting, follow the 4 below  steps:

1) Give your credit time to rebound

Whether you filed bankruptcy because of a divorce, medical bills, job loss, or bad spending habits — put some time on the calendar between your bankruptcy and any application for a mortgage.  As a general rule, the more time that has passed since your past financial problems, the better. It’s a smart idea to use this down-time to start saving for your down payment.

2) Fix the root of your money problems

Figure out what caused your financial problems and do what you can to make sure you don’t repeat the past. If you had to file bankruptcy because of your credit card spending, make sure you don’t get yourself into the same mess after your bankruptcy discharge. Mortgage lenders aren’t likely to help you if you appear to be repeating the same bad habits.

3) Pay your rent and any other monthly bills on time for two years

Do whatever it takes to pay your rent and other monthly bills on time for twenty-four consecutive months. If you miss a month and it’s reported to the credit bureaus, the clock starts again from zero. If your landlord or creditors don’t report your late payments to the bureaus, you’ll still be on track. Also, make sure you get a dated receipt from your landlord for every rent payment, which you can use to show a mortgage underwriter that you’re now financially responsible.

4) Try to save up as much as you can for a down payment

Be wary of no-money-down or interest-only mortgages.  Having a solid down payment shows a mortgage lender that you’ve taken steps to save and overcome your past financial problems. A down payment will also reduce your monthly mortgage note and may save you from paying additional default insurance on your loan.

While there are some lenders who may finance a mortgage in as little as one day after your bankruptcy discharge, the interest rates offered by those lenders will usually be higher than the rate you could obtain after rebuilding your credit for two years. Therefore when buying a house after filing bankruptcy, it’s often wise to wait the two years to rebuild your credit and save for a down payment.

Bankruptcy Filings Expected to Increase in 2007

The new bankruptcy laws went into effect October 17th, 2005, since then the number of bankruptcy filings has plummeted.  For the 3rd quarter of ’06, bankruptcy filings were down an astonishing 68.4% from the same quarter of ’05.  Many commentators attribute the dramatic reduction in filings to the “new and tougher” bankruptcy laws. However, I believe that the new bankruptcy laws themselves have little to do with the downturn in filings and that consumer bankruptcy filings will gradually increase throughout 2007 as the public gains a better understanding of the new laws and the backlog of financially distressed people rebuilds.Â

The vast majority of people who filed under the “old law” would still qualify to file bankruptcy under the “new law.”  Although the new bankruptcy law includes a “means-test” that sets an income limit for Chapter 7 bankruptcy eligibility, the majority of debtors are below this limit and Chapter 13 bankruptcy is still available to anyone whose income exceeds the allowable amount. A basic credit counseling course, debtor education course, and more required documentation are the most significant changes required by the new bankruptcy law.  Even after the law change, bankruptcy remains a relatively simple option, especially with the help of an experienced bankruptcy attorney. Â

I expect bankruptcy fillings to increase in 2007 for two major reasons:

  • The Public is Learning the Facts about the Bankruptcy Law ChangeIn an attempt to capitalize on the bankruptcy law change, many bankruptcy law firms heavily advertised the urgency of filing before the impending legislation and painted a dire picture of bankruptcy after the law change. Their messages included “File now, before it’s too late,” “Beat the Law Change,” “Last Chance to File Bankruptcy.”Â This advertising blitz had the desired effect of a large spike in bankruptcy filings leading up to the law change, but also inadvertently created a misconception that the new bankruptcy laws were so tough that bankruptcy would not be a viable option after the law change.Â

    In reality, bankruptcy still exits and offers much the same relief that was offered prior to the bankruptcy law change. As bankruptcy attorneys shift their advertising messages to “You Can Still File Bankruptcy” and “Bankruptcy is Still an Option,” the public is slowly gaining a better understanding that although the law change did make dramatic changes to the bankruptcy law, the intent and power of the bankruptcy process remains largely unchanged.  It takes time to educate the public, but look for bankruptcy filings in 2007 to increase as the public separates the bankruptcy myths form the bankruptcy truths.

  • The Amount of People Who Need to File Bankruptcy is IncreasingÂPeople usually don’t go bankrupt overnight; the accumulation of debt is usually a gradual process over a period of years.  People usually file for bankruptcy shortly after an event that forced them to take action; this is usually some form of creditor collection activity (phone calls, garnishments, lawsuits, foreclosures, etc.). Many people who could benefit from filing bankruptcy don’t file until a creditor forces them to take action.Â

    In my experience as a bankruptcy attorney, I’ve noticed that creditors only have the resources to actively collect on a small percentage of total debts. This results in a large buildup of people who are effectively “bankrupt,” but haven’t filed formal bankruptcy proceedings. Before the law change of 2005, this buildup steadily maintained itself, but the majority of people who were effectively “bankrupt” filed for bankruptcy independent of any action from their creditors because of the bankruptcy law change. Over the course of the 15 months since the law change, the number of people “on-the-fence” has steadily increased and bankruptcy filings are likely to increase in 2007 as creditors force these people into taking action to protect their property and wages.

Most bankruptcy attorneys that I have spoken with agree that the volume is steadily increasing and anticipate the filings to increase in 2007, especially over the 1st quarter, which is usually the busiest time of year for a bankruptcy law firm.  Â

Using Tax Refunds to Pay Attorney Fees

In 2004, the U.S. Supreme Court ruled that all attorney fees in a Chapter 7 bankruptcy must be paid by the client before the filing of their case.  The court’s rationale was based on the fact that once a Chapter 7 bankruptcy was filed, any debts that the client owed at that time of filing were eliminated, including owed bankruptcy attorney fees. This ruling therefore made any unpaid attorney fees uncollectible after the filing of the client’s Chapter 7.  The ruling also did away with the commonly-used “split fee”, where bankruptcy attorneys would allow their clients to pay a portion of the attorney fees pre-filing, and then pay the remainder of the owed fees after the filing of their Chapter 7 bankruptcy.

While the majority of bankruptcy attorneys nowadays offer a monthly payment plan for their attorney fees, a Chapter 7 bankruptcy can’t be filed until all the attorney fees are paid-in-full.  This can make it difficult for those people who need their cases filed immediately because of a garnishment, utility shutoff, etc., but don’t have the funds to pay theentirety of their attorney fees.  This is where tax refunds can come in handy.

The largest number of Chapter 7 bankruptcies and Chapter 13 bankruptcies are filed in the first-quarter of the calendar year, and this is largely due to the fact that most people receive their tax refunds around this time.  Many bankruptcy clients have discovered that it’s a good idea to use their tax refunds to pay their bankruptcy attorney fees in full and expedite the filing of their cases.  This can be especially beneficial for those who have
a “rush case” that involves a foreclosure, repossession, license suspension, frozen bank account, garnishment or utility shutoff.

So keep in mind it’s typically smart to take advantage of the lump-sum received from a tax refund to get your attorney fees paid. The faster your attorney fees are paid, the faster your case can be filed. The faster your case is filed, the closer you are to a financial fresh start.

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