A New Chapter
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.
In a Chapter 13 bankruptcy, a debtor with a steady income can develop a repayment plan that lets him or her keep all or most of a property. In a Chapter 7 filing, a person's assets are sold to pay off creditors.
Overall, bankruptcy filings are on the rise.
The Administrative Office of the U.S. Courts said this month that the number of 2009 bankruptcies, both business and consumer, rose 32%, to roughly 1.5 million.
However, Chapter 13 filings as a share of the total have been on a steady decline in recent years while Chapter 7 filings have risen rapidly.
Chapter 13 filings made up about 28% of all bankruptcy filings in 2009, down from about 32% in 2008 and 38% in 2007. Chapter 7's, on the other hand, made up about 71% of all filings last year, up from 67% in 2008 and 61% in 2007.
"In Chapter 13 you have to go forward and make your payment every month," said Katie Porter, an associate professor at the University of Iowa College of Law. "Chapter 13 is very poorly suited for the kinds of problems families facing foreclosure in the last two years have been handling. If you can't afford your mortgage, Chapter 13 does not do anything to solve that going forward."
The growing share of Chapter 7 filings comes even after the enactment of legislation meant to discourage them. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was intended to force more people to pay their debts.
However, some debtors do not have much choice these days when it comes to the type of bankruptcy they pursue.
"A lot of people are losing jobs," said Ron Toigo, an associate 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."
Eye on GMAC
GMAC Inc. may still be searching for a buyer for its ailing mortgage unit, but the auto finance company has found one for one of its smaller, lower-profile businesses.
Wells Fargo & Co. said Wednesday that it had agreed to buy the factoring portfolio of GMAC's commercial finance arm. The portfolio comprises about 150 small or midsize commercial clients who generate about $4 billion of factored receivables a year.
Factoring is a type of short-term financing whereby a business sells its accounts receivable, often at a discount to face value, to a third party, which assumes the credit risk. Stuart Brister, the president of the trade capital division at Wells Fargo, said in a press release that the San Francisco banking company has been in the factoring business for more than 50 years.
Wells did not say how much it would pay for the portfolio. The deal is expected to close in April.
GMAC had previously said it was committed to selling "certain operations" of its commercial finance group. In its financial statements, GMAC includes the commercial finance business under the grab-bag heading "corporate and other."
Various news outlets reported this month that GMAC had hired Goldman Sachs & Co. to shop around the unprofitable mortgage unit, Residential Capital LLC, to potential buyers. Michael Carpenter, GMAC's chief executive, has described ResCap as "a millstone around the company's neck."
"Hamp is not and was never intended to be the be-all and end-all to solve the economic decisions of the world. You can't resolve the fact that borrowers don't have jobs. You can't resolve the fact that property values decline. There really isn't a solution unless someone comes up with the money and Treasury can't mandate that third party holders write down their loans."
— Laurence Platt, leader of the financial services practice at the law firm K&L Gates LLP, on the Home Affordable Modification Program.