FHA Mortgage Guide

It’s unbelievable. More than 100,000 people went bankrupt in October.

Given the current economic circumstances, it might seem reasonable for lots of folks to head to the nearest bankruptcy court. In fact, the bankruptcy process was changed in 2005 to assure that borrowers had as few rights as possible, thus discouraging bankruptcies.

How was the law changed?

As reported at OurBroker.com, “Effective October 17, 2005 most student loans can no longer be discharged. If your income exceeds the state medium you can be forced to file under Chapter 13 (a repayment program) and not Chapter 7 (a discharge and forgiveness plan). Credit debt is not forgiven if you spend at least $500 in the 60 days prior to seeking bankruptcy protection — say a cash advance to pay off a looming mortgage payment.

“Perhaps most importantly for mortgage borrowers, the 2005 legislation says homeowners must obtain credit counseling and develop a budget analysis in the 180-day period before filing for bankruptcy.”

Of course, within 180 days you could be foreclosed before you can even get to a bankruptcy court.

Now the American Bankruptcy Institute reports that “overall October consumer filing total of 106,266 also represented a 20 percent increase from September. Chapter 13 filings constituted 32.6 percent of all consumer cases in October, a slight decrease from September.

“The October consumer filing total also represents the first time that bankruptcies have topped 100,000 since the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect in October 2005. The 880,076 consumer filings through the first 10 months of 2008 (Jan. 1 - Oct. 31) have already eclipsed the filing total of 822,590 for all of last year.”

“October’s sharp spike in new consumer bankruptcies confirms the severe financial stress on household budgets caused by high debts, flat incomes, and declining home values,” said ABI Executive Director Samuel J. Gerdano. “We expect the 2008 numbers to be the highest since the new bankruptcy law went into effect in 2005.”

Financial stress? How about a world-wide disaster built on fake loan applications, predatory mortgages, massive prepayment penalties, insurance policies without reserves, grossly ineffective regulation and levels of risk which could not possibly be sustained. And weren’t.

The good news, relatively, is that those who financed with FHA mortgages at least have a shot at financial security. You’re unlikely to go bankrupt with FHA loans because they prohibit massive payment increases, prepayment penalties or new loan applications which do not include checks for income and employment.

It’s unfortunate that many neighbors did not follow the same course.

For the full story, see: Is It Time To Take The Tilt Out Of Bankruptcy?

Check out these FHA resources for more information

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