Homeowners find bankruptcy fails to prevent foreclosure

April 11, 2007
Homeowners find bankruptcy fails to prevent foreclosure

NEW YORK --More financially stretched borrowers are realizing that even declaring bankruptcy can't save their homes from foreclosure.

At the same time, the study shows, the number of borrowers actually able to bring current their mortgage payments through bankruptcy is declining, and more filers are ultimately turning their homes over to the lenders. The finding means investors in high-yielding mortgage-backed securities should expect higher losses on the underlying collateral.

At least part of the reason, says the report, lies with the bankruptcy law passed in October 2005. The law raised the bar for people to qualify for Chapter 7 "fresh-start" bankruptcy proceedings. Chapter 7 helps individual filers to wipe away debts such as credit-card and medical bills so they can continue to make their mortgage payments. With access limited, more subprime borrowers are forced into Chapter 13, where some can't maintain their payment schedules for more than a couple of months.