The NY Federal Reserve bulletin for this month contends that the bankruptcy reform act of 2005 helped increase the number of foreclosures. There are two basic options for personal bankruptcy - Chapter 7 and Chapter 13.
Chapter 7 allows you to keep all of your income while freeing you from having to pay unsecured creditors (such as credit card companies); however, you lose your house or the equity you have in it that exceeds a certain amount. The result is that you usually have more cash to pay your mortgage as your other loans are forgiven.
Chapter 13 allows you to keep your home but directs you to pay off all creditors over a period of three - five year. Thus, you do not have any extra cash.
The act forced more people into Chapter 13 as it has a means test. If you have at least $167 of free cash per month, then you must go into Chapter 13 rather than Chapter 7 where you would have extra cash to pay off the mortgage.
Interesting theory.
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