I believe that the consumer bankruptcy world is going to be drastically affected by the federal debt ceiling crisis. As you have probably seen in most media reports, the United States will lose its AAA credit rating in the event of a default. Some are predicting that even if the debt ceiling is raised without addressing how to ultimately reduce the debt, the government will still lose its AAA credit rating. As a consequence, interest rates across the board are going to rise.
The problem with increasing interest rates is the effect on monthly mortgage payments. Many of my Chapter 13 bankruptcy clients have adjustable interest rates on their home mortgage.
It’s important to note that a Chapter 13 bankruptcy has zero effect on your future mortgage payment. Thus, if you have an adjustable mortgage rate that is set to increase your monthly mortgage payment as interest rates rise, Chapter 13 won’t stop the increase. However, many debtors find that it is much easier to pay a rising mortgage payment if you can eliminate all of the credit card debt and medical debt in a Chapter 13 bankruptcy.
It’s unfortunate that bankruptcy judges don’t have the power to lower future mortgage payments. If I had my way, judges would be able to modify the loans. The foreclosure meltdown would have been prevented if bankruptcy judges had possessed this power before the crisis hit.
When the mortgage payment increases by a few hundred dollars per month, this will be enough to push the payments out of reach for many of my bankruptcy clients. As a consequence, they will lose their homes to foreclosure when they can no longer afford the future mortgage payments.
For many Chapter 13 cases, saving the home is their only reason for making the case work. Once they lose their home, I predict that many debtors will either convert their Chapter 13 to a Chapter 7 or just quit the case altogether.
Many people who are currently considering Chapter 13 as an option will most likely lean toward Chapter 7 once their future mortgage payments go up as a consequence of rising interest rates. Thus, Chapter 7 filings will rise and Chapter 13 cases will drop.
I am hoping and praying that the United States will not default.