ALBUQUERQUE, N.M. — A dwindling number of financially insolvent consumers in New Mexico are making an attempt to pay back their debt through a Chapter 13 petition in Bankruptcy Court, according to the Administrative Office of U.S. Courts.
One of four basic “chapters” or types of bankruptcy, Chapter 13s made up 7.3 percent of all bankruptcies filed during the first quarter. The 64 petitions were the lowest number of Chapter 13s filed in the state since 2006, when filings plummeted after a major overhaul of bankruptcy law.
Nationwide, Chapter 13 bankruptcies made up 34 percent of all filings in the first quarter, the administrative office reported.
Chapter 13 is a way for a consumer to reorganize his or her finances and come up with a debt repayment plan that’s approved and administered by the court. It is often used by homeowners delinquent on their mortgage payments to stave off foreclosure.
From the standpoint of saving a house, the big flaw with Chapter 13 is that mortgage modifications are not allowed in Bankruptcy Court, said bankruptcy lawyer Dave Giddens.
Mortgage modifications were common before 1994, when changes were made to bankruptcy law.
“It was a backwards step from a consumer standpoint,” Giddens said. “The mortgage industry has a very strong lobby.”
Changes in the mortgage industry due to the foreclosure crisis and government intervention have improved the odds that a homeowner can get a loan modification, thus eliminating the need to file a Chapter 13 bankruptcy under some circumstances, said bankruptcy lawyer Ron Holmes.
Other factors mentioned by Giddens and Holmes that influence lower Chapter 13 filings include low incomes prevalent around the state, which means that many bankruptcy filers don’t have the means to make a go at repaying their debt. More than half of all Chapter 13 plans fail both here and nationwide.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was a game-changer in bankruptcy, making the process more demanding and costly. The act’s expressed goal was to increase the volume of Chapter 13s and decrease Chapter 7 liquidition bankruptcies.
For the most part, the act failed to achieve its goal.
In the 2000-04 run-up to the act, 11.2 percent of all bankruptcies filed in New Mexico were Chapter 13s, compared to 28.7 percent nationwide. In 2011-15, 7.4 percent of all bankruptcies in New Mexico were Chapter 13s, compared to 30.4 percent nationwide.