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Turn Your Stucco into Sand

posted by Melissa Jacoby

I once received a pink flyer from a major bank that said in bold letters “Turn your stucco into sand,” while the inside of the flyer advertised home equity loans for purposes of taking beach vacations. This was supposed to be an enticement, but with this stucco-into-sand imagery, it seemed more like a warning about the consequences of using home equity, leaving people to make their own choices. I’m starting to wonder whether the bankruptcy system needs a similar warning. First, studies by Cheryl Long and Aparna Mathur suggest that there generally are longer-term home-owning consequences to filing for bankruptcy. Second, some homeowners file for bankruptcy primarily to save their homes from foreclosure -- presumably because their lenders/servicers will not agree to a workout with a borrower they believe cannot or will not sustain the mortgage, but possibly for other reasons. These filers use chapter 13 bankruptcy, which not only stops a foreclosure but allows them to cure a default over time over the objection of the lender/servicer. The administrative costs alone of chapter 13 to the homeowner probably add up to at least one or two mortgage payments, or, if homeownership is not to be, then a few months of rent in a new home. But I’ve seen no evidence that chapter 13 turns out to save homes in the long term, or that it is any more successful than other anti-foreclosure interventions. We’ll get help figuring this out once real estate finance experts recognize chapter 13 for what it is – a federal mortgagor protection device, albeit of unknown efficacy, that overrides many of the state real estate laws they have spent considerable time analyzing.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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