Saturday, June 26, 2010

Second Liens and Personal Bankruptcy

by Calculated Risk on 6/26/2010 12:31:00 PM

From Mary Ellen Podmolik at the Chicago Tribune: Moral bankruptcy?

[Filing bankruptcy] may seem an extreme riff on the difficult decisions homeowners make to unburden themselves of debt owed on properties that have lost substantial value. Lawyers and housing counselors say, however, that personal bankruptcy filings are becoming more commonplace as debt-holders seek sums due them, particularly on second "piggyback" mortgages used to buy homes.

"It's a big trend," said Dan Lindsey, a supervisory attorney at the Legal Assistance Foundation of Metropolitan Chicago. "Banks are having a hard enough time dealing with the first mortgages. The second (mortgages), there's no equity there to collect so they're being charged off and sold to debt buyers and rearing their ugly heads later. It's a drastic last resort to file Chapter 7, but in some cases it's appropriate."
...
"My other option was to say I'll roll the dice with the bank," [former homeowner Del] Phillips said. "Will they really come after me? I wouldn't put it past the bank industry to do that. It's going to kill me to pay a bank for a house I no longer owned. I was, like, there's no way I'm going to pay the bank another dime."
I suspect eliminating debt from 2nd liens is one of the reasons there has been a surge in personal bankruptcy filings this year. The deep recession and high unemployment rate are probably the main reasons.