November 7, 2007 Rocky Mountain News
Facing rising mortgage payments and a weaker housing market, more Coloradans are turning to Chapter 13 bankruptcy to try to avoid losing their homes.
"Given the dramatic spike in foreclosures, we're seeing a lot more people coming in saying, 'I want to save my house, but my mortgage has adjusted, what can I do?' " Denver-based bankruptcy lawyer Tara Gaschler said.
In a year that could set a state record with more than 40,000 foreclosures, many people had mortgages with low introductory rates that are being reset higher.
"Now they're in over their heads," Gaschler said.
Chapter 13 can allow people to pay off mortgage and other debts over three to five years and to avert foreclosure. For those who have fallen behind because of sickness, job loss or a one-time setback but have steady income, Chapter 13 represents "a chance to get caught up and hold on to their property," she said.
Chapter 7, she said, means liquidation, and in many cases debtors can kiss their homes goodbye, even if a filing puts a temporary freeze on a foreclosure.
Still, many people across the state are in too deep of a hole to hold on to their residences, and a bankruptcy filing will be a stain on their records, affecting their ability to get financing.
Lawyer Larry Carroll said 20 percent of the cash- strapped Coloradans walking into his office end up entering Chapter 13 - double the traditional level - but many of them who are hoping to stave off foreclosure ultimately fail.
When monthly mortgage costs increase, clients usually cannot keep pace, he said. For primary residences, mortgage terms cannot be modified in bankruptcy, he noted.
"People expected an ever-appreciating home real estate market," the attorney said.
This year, Chapter 13 filings account for about 16 percent of all Colorado bankruptcy cases, up from 10 percent in 2003 and 2004, before new legislation sparked a frantic rush to the courthouse.
The number of bankruptcy cases in Colorado soared to 43,100 in 2005 as people raced to beat the deadline; the number fell sharply to roughly 9,700 in 2006. Many who would have waited to file in 2006 chose to do so earlier, and others may have been led to believe bankruptcy was no longer an option. Now the case load is increasing again, with the 2007 figure nearing 15,000, up 60 percent from last year.
Before long, the volume could return to the levels seen before the new law made headlines.
Grand Junction and the Western Slope - where the economy has flourished amid an energy boom - make up 4 percent of all the state's bankruptcy cases, down from about 9 percent in 2001.
The stricter bankruptcy law was designed to steer more people from Chapter 7 into Chapter 13. The former wipes out debts such as credit card and medical bills after certain assets have been forfeited, providing a "clean start." The latter requires debtors to adhere to a repayment schedule. Banks and credit card companies backed the law, arguing that people too often abused the system. Consumer advocates said those financial firms are to blame for Americans' huge debt.
The legislation also implemented a "means" test, gauging a consumer's ability to repay their obligations. Those deemed to have insufficient assets or income still can file for Chapter 7.
The law isn't as restrictive as many expected. More than 90 percent of the people who met the Chapter 7 criteria yesterday still do today, experts said.
"The 2005 media blitz created the perception that it was no longer available or only as a last extreme," said Brad Bolton, clerk of the Colorado bankruptcy court. "That's simply not true, and people are discovering that."
"Consumers ought to know it's still accessible," Bolton added. "It hasn't changed significantly or impacted most people, other than requiring a little more work up front."
Bankruptcy lawyer Gaschler said plenty of Coloradans looking at Chapter 13 as a way to stay off the long foreclosure line are bound to be disappointed.
"The real key to Chapter 13 is the ability to be able to have some sort of steady income," she said. "If you are $15,000 behind on your mortgage, and you can't make regular payments, it might be time to face the facts."
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