Bankruptcy as a means of halting foreclosure, for a moment

Living in a state with one of the quickest foreclosure tracks in the nation, many struggling Georgians learn that their homes will be sold on the courthouse steps just a matter of weeks before the sale.

For those unwilling to walk away from their home, one possible next step is quick and controversial: declaring bankruptcy.

Filing Chapter 13 bankruptcy in Georgia effectively halts foreclosure proceedings in the short-term. And as record numbers of Georgians fall behind on payments and receive foreclosure notices, filing bankruptcy has become a common tactic, some experts said.

"Bankruptcy courts have become the forum of choice to stop foreclosures, not only in Georgia but throughout the country, because the injunction to stop those foreclosures in bankruptcy court is automatic," said Howard Rothbloom, an Atlanta bankruptcy attorney who has been in practice for more than two decades.

Or as Georgia State University law professor Jack Williams explains: "It’s like a time out. Like a game of freeze tag. You’re safe, but only for a period of time."

The immediate advantage of filing for bankruptcy, they said, is that it buys time to assess whether homeowner can afford to keep the home.

Both foreclosures and personal bankruptcies have increased dramatically in Georgia since 2006, by 67 percent and 93 percent, respectively. That does not prove a link, and there are no hard numbers to show one. (The bankruptcy filings also include business bankruptcies, but they are a fraction of the total, and many involve small businesses whose owners are in personal financial distress.)

Doug Erickson, vice president of partner relations with Atlanta-based CredAbility, a consumer credit counseling service, said about 20 percent of the agency's clients who file bankruptcy cite foreclosure as the primary reason. CredAbility began tracking foreclosure as a reason for bankruptcy in early 2009.

"The problem we find is that people wait too long to get help. They don’t come to us when they are two or three months behind, but they come when they are six months behind or there is a foreclosure sale scheduled in two weeks," he said. "Because of that, bankruptcy is the most immediate answer, the most immediate cure. [However] it’s not necessarily the best cure."

There's more than one type of bankruptcy. In a Chapter 7 bankruptcy, a trustee takes over one's property and sells it to pay back creditors. That's not the one in question here.

To protect an asset such as a home, people typically file a Chapter 13 bankruptcy. In that process, a bankruptcy attorney assesses the person's debts and creates a three- to five-year plan for him to pay back secured ones, such as student loans and primary mortgages. Unsecured debts, such as credit card debt or secondary mortgages, are often partially or wholly written off.

If the bankruptcy court approves the plan, the person makes payments to a trustee who distributes the funds to creditors. A debtor can still lose his home under a bankruptcy plan should he miss a payment.

Howard Milan filed Chapter 13 bankruptcy in 2007 when he and his wife fell behind on payments for their Woodstock home. The couple had invested in a restaurant that failed and they were nearing foreclosure, but wanted to hold onto their home to avoid uprooting their children, now 13, 15 and 18.

Through bankruptcy court, the Milans were given a five-year program to pay off their debts and hold onto their two-story house. But it hasn't been that easy, Milan said. Like many, the Milans are caught in an intricate and confusing financial maze. The lender claims Milan has missed eight payments during the bankruptcy, though Milan says he has proof he has paid.

"I've made all my payments, but can't get accurate statements from the bank, no statements by mail, so I have no idea how my payments to bankruptcy court are being applied," Milan said. "It's been a huge mess. I'm three years into it and still the only way to resolve anything is to hire a forensic accountant to study the problem."

Milan wonders if filing Chapter 13 was worth it, even though the move has helped his family stay in their home for the past few years.

"Three years later I've paid an extra $30,000 into the courts, but I could've walked away. That would've been $30,000 into the bank," he said. "I would've been starting over three years ago; not dragging it out."

Michael Rethinger, an Atlanta-based bankruptcy attorney, says filing bankruptcy doesn't make sense for everyone. He advises people heading into financial trouble to speak with debt counselors or a bankruptcy attorney to determine their best route.

"If you’re upside down on the mortgage, the first question to ask yourself is: Is it worth it to stay in the property?" Rethinger said. "I see plenty of people trying to hold onto homes that aren't worth it."

Andrew Dorsey, an officer with the Atlanta Police Department, considered filing a Chapter 13 bankruptcy when he received a foreclosure notice in December. For the previous six months, Dorsey had been trying to modify his loan and had missed a few payments on the advice of his lender and housing counselors, he said.

"Everybody I talked to said the same thing: There’s nothing we can do unless you fall behind," said Dorsey, who first struggled to make the payments after his divorce. "I said if that is what I had to do, that's what I would do."

He consulted with Rethinger, who assessed his situation: he was behind four payments, has a steady income, minimal credit card debt and no car payment. His mortgage is $114,000, but his house is valued at just $74,000. Filing for bankruptcy was a viable option, Rethinger said, but did it make sense?