Chapter 13 bankruptcy filings have become less popular since the housing crisis began, and some experts say this is a direct result of fewer people trying to save their homes.

According to the Administrative Office of the U.S. Courts, Chapter 13 filings fell to about 28 percent of all bankruptcy filings in 2009, down from about 32 percent in 2008 and 38 percent in 2007.

In a Chapter 13 bankruptcy, a debtor with a steady income can devise a repayment plan and keepmost property. But bankruptcy judgesare not permitted to lower the principal or alter the terms on first mortgages."Chapter 13 is very poorly suited for the kinds of problems families facing foreclosure in the last two years have been handling," says Katie Porter, an associate professor at the University of Iowa College of Law. "If you can't afford your mortgage, Chapter 13 does not do anything to solve that going forward."

Overall, bankruptcies are on the rise. In 2009, the number of filings, both business and consumer, rose 32 percent from the year earlier, to roughly 1.5 million total.

But the mix is changing, with Chapter 7 bankruptcies gaining popularity. Those made up 71 percent of all filings last year, up from 67 percent in 2008 and 61 percent in 2007.

With Chapter 7, a person's assets are sold to pay off creditors.The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was intended to dicourage those filings and force more people to pay their debts. However, debtors often don't have much choice these days."A lot of people are losing jobs," says Ron Toigo, an attorney in the bankruptcy department of Kerry Steigerwalt's Pacific Law Center in San Diego. "In order to be in 13, you have to have some sort of steady income."

BankThink is a forum for ideas, commentary and reader feedback. If you have something to say, send an email to alan.kline@sourcemedia.com. For regular updates, click on the BankThink link at us-banker.com.

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