When most people think of bankruptcy they think of a person who is insolvent. “Insolvency” has two definitions for bankruptcy. One is the inability to pay your debts as they become due. The second is, assets are less than liabilities. It’s this second definition that most associate with bankruptcy.
But a person can have more assets than debts and still be insolvent in the sense she can’t pay her debts as they come due. Over the past ten years during the economic meltdown of 2008 and the recovery, lots of people had more assets on paper than they had liabilities but couldn’t make their scheduled debt payments. Home loan interest rates were relatively high in 2005-2008, around 7.5% compared to 4.5% today. When the recession hit millions of borrowers tried to refinance their mortgages. Stories were legion about borrowers getting the runaround from the workout department of their banks who told them to stop making mortgage payments while the bank looked at their refinance application. Meanwhile the foreclosure department went ahead with foreclosure because the loan wasn’t current.
In some cases people with a lot of equity in their homes were on the eve of foreclosure because the workout and foreclosure departments weren’t talking to each other. In order to save their homes, many of them filed Chapter 13 bankruptcies. Sometimes the delinquent mortgage payments were the only debts these people had. They had no credit card debt, no medical bills, no judgments against them — none of the things usually associated with bankruptcy. Through Chapter 13 they were able to repay the past due mortgage payments over the life of their plans (up to five years) and avoid foreclosure.
Chapter 13 might be able to help you if you’re behind on mortgage or car loans and are facing foreclosure or repossession. If you would like to talk about it, contact us.