The Disconnect Between Foreclosures and Bankruptcies

Recently, the American Financial Services Association posted a blurb on their website “Spotlight on Financial Services” noting a continuing “disconnect between rising foreclosures in the subprime mortgage market and the statistics on personal bankruptcy filings.” Personal bankruptcy filings in 2007 continue to poke along at rates a bit above the same period in 2006, but far below the rate of filings in 2002-2004.

The post suggests that bankruptcy filings lag behind as borrowers attempt to absorb the changes in ARM rates, and due to the length of the foreclosure process itself. As consumer practitioners know, summer is a time when bankruptcy filings typically dip. Whether or not we feel the dip this summer, the post maintains that increased foreclosures must eventually result in increased bankruptcy filings, especially under chapter 13 by borrowers who want to save their home by repaying mortgage arrearages.

I question whether ARM foreclosures will cause much of a spike in chapter 13 filings. Chapter 13 is a cure for foreclosures that resulted from changes in the borrowers’ circumstances, like a layoff. You can’t rewrite an ARM under chapter 13. The only borrowers that can succeed in solving their ARM woes are those who can make their new, higher mortgage payments by not paying their old unsecured debt and not incurring new unsecured debt along the road to recovery.