When borrowers go bankrupt, they retain the assets and the lender loses wealth
The lender loses in that the capitalised value of the assets is lower than the amount of the loan, generally. But he's the one to whom the claim on real assets are transferred. He owns what used to be his stuff, plus the stuff that used to belog to the borrower. It's just that what he owns has a smaller capitalised value. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
In a foreclosure, it is true that the bank retains the right to the property, but the net value of the property was transferred, through an exchange of cash during the last sale of the home, to the previous homeowner. The current lender lost and the previous homeowner gained by the exact amount of the present value of the foreclosed home and the last sale price of the home.
bankruptcy almost always protects homeowners' right to retain the property
In most cases, homestead exemptions do not apply to forced sales to satisfy mortgages, mechanics liens, or sales to pay property taxes.
Texas Homestead Exemption also prevents the forced sale of a home to meet the demands of creditors, with the exception of mortgage holders, note holders and tax authorities.
In addition to bankruptcy, there are other, less onerous legal means, such as debt renegotiation, that can also reduce debt to a manageable level and prevent foreclosure.
Nonetheless, many foreclosures obviously occur, and this is because the conditions that allow bankruptcy to save one's home are not available to everyone -- some people lose their jobs as well as their net worth at the same time, so they escape debt by walking away from everything. (This is still a net transfer of wealth from the creditor to the previous homeowner, however -- it harms the creditor as much, if not more, than the debtor.) But I would be surprised, in any industrialized country, if there were ever many cases of individuals filing for personal bankruptcy and also losing their home. I can't find any sources that say otherwise.
The article claims that the number of foreclosed and repossessed homes in the province of Alicante in the first 9 months of 2009 is 2257, 65% higher than the previous year, and that around 6000 more families are "at risk". The population of the province of Alicante is 1.9 million.
Also, in July the governing body of the Spanish Judiciary published a report claiming that the number of foreclosures in the first half of the year had doubled from one year earlier and forecast that in 2009 there would be 160,000 foreclosures nationally. A separate report claimed each additional percentage point of the Euribor would result in 50,000 additional repossessions. The population of Spain is under 47 million.
Even though Euribor is now at historical lows (about 1%) a year ago it was 5% and the resulting wave of repossessions is only now reaching the courts. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
foreclosures are almost always a net transfer of wealth from bankers to homeowners
With the foreclosed person as collateral damage? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
As far as I know, it's still not, at least in the US. The home exemption means that other creditors cannot force you to sell your home as an asset to pay them. Only a certain amount of equity is exempt. The mortgage is a different story -- you can't discharge it in bankruptcy and banks can foreclose and take their asset back, although I think they have to wait until the other debt is discharged before they proceed. Maybe we can eventually make language a complete impediment to understanding. -Hobbes
But when people default on their mortgage they can get foreclosed and repossessed, and they will unless the bank has inexplicably (heh) misplaced the loan documents. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
the new bankruptcy laws in the US which made it more difficult for people to escape credit card debt by filing for bankruptcy
More homeowners are likely to avoid repossession than previously expected during the recession, according to the Council of Mortgage Lenders. But the CML's announcement today that it had overestimated the number of people likely to lose their home this year coincided with data showing the number of actual repossessions in the first three months were 62% higher than a year earlier.The CML has cut its estimate for the number of homeowners facing repossession this year to 65,000, from its previous estimate of 75,000. However, the new figure is still the highest since 1992.
More homeowners are likely to avoid repossession than previously expected during the recession, according to the Council of Mortgage Lenders. But the CML's announcement today that it had overestimated the number of people likely to lose their home this year coincided with data showing the number of actual repossessions in the first three months were 62% higher than a year earlier.
The CML has cut its estimate for the number of homeowners facing repossession this year to 65,000, from its previous estimate of 75,000. However, the new figure is still the highest since 1992.
If your property serves as collateral for a loan, you need to timely pay all monthly payments on these loans in order to keep the property.
An additional point is that filing for bankruptcy has, in the U.S., been made much harder, so people might just be walking away from their homes without filing, while being (informally) bankrupt.
The lender has security over the property which is superior to the claim of the owner. In a bankruptcy, the title in the asset passes to a trustee in bankruptcy (not sure what the US equivalent is called), but the bankrupt may well stay on there as a 'debtor in possession', provided he pays the mortgage.
If he doesn't then he'll be out on his arse.
Debtor in possession financing is a huge business in the US in relation to the financing of assets which are in Chapter 11 - ie corporate insolvency.
If there is no equity in the property, then the bank may well decide to let the borrower stay on in the property, provided he pays the mortgage loan and interest.
But the property does NOT - unless US law is diametrically opposed to UK law - become that of the bankrupt free of mortgage, which appears to be what your are suggesting.
FWIW my first job was as an Examiner in Insolvency - working for the Official Receiver (an officer of the court) - and I've dealt at least a hundred individual bankruptcies, and a few dozen corporate insolvencies, with some interesting wrinkles. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
But the problem bankrupts in the UK have (or had - it may have been amended) is that the home belongs not to them, but to their trustee in bankruptcy. I saw cases where the trustee came back years later and sold the house over the (by now) former bankrupt's head, paying off the mortgage loan, and then making a distribution to creditors from the balance.
And of course the former bankrupt had to find somewhere else to live if he could not afford to buy the house back at the market price.
So the bankrupt would normally (if he was financially capable of paying the mortgage) arrange for (say) his wife, or a relative he trusts, to buy out the trustee's interest in the property, which might not cost that much if there is little equity.
It is true that in the UK, bankruptcy - alone - rarely, if ever, precipitates eviction. It is actually beneficial, rather than prejudicial, to the secured creditor.
I am reminded of the Jubilee Debt Campaign, where I was at first surprised to see the banks backing the campaign to relieve heavily indebted nations of debt. It took a little time to realise that if sovereign debt was forgiven, then there would be that much more free income to pay the bank debts.....D'oh...!! "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
