When debtors have too few funds to pay too many debts, they don’t try to distribute their money among all their debts. Rather, they prioritize some debts over others. The insight, courtesy of a blog post at the Federal Reserve Bank of New York’s Web site, can help debtors and New York bankruptcy lawyers determine which chapter is best to file in.
The post’s authors used data from the New York Fed’s Consumer Credit Panel and compared debtors’ choices in paying off some loans over others. They developed a head-to-head match-up system, much like predicting the odds of sports outcomes, for each type of debt. This allowed them to predict how likely debtors were to repay one debt against all others simultaneously.
The initial results met expectations: In 2000, borrowers were nearly 11 times more likely to make an auto or mortgage payment than a credit card payment, indicating the value of secured debts over unsecured debts. However, these odds ratios do not hold up over time. Once the recession began in 2009, borrowers suddenly reduced their priority for mortgage payments. Meanwhile, their preference toward auto debt remained the same, and their priority for credit-card debt rose significantly.
The authors applied their data to each of the U.S. states, and they found that in California, Nevada, and Florida, debtors’ priority for mortgage debt fell the most. New York was not too far behind. It’s no coincidence that home values fell the most in these states, and the researchers speculated that these findings indicated debtors were strategically defaulting on their mortgages, which contradicts more recent research on the “lock-in effect.” If the debtors were going to lose their homes anyway, then their mortgage debts really weren’t all that different from credit-card debt. Their cars, on the other hand still retained some value to them.
The blog post includes two other interesting findings. One, even by 2017 debtors’ priority for making mortgage payments hadn’t returned to precession levels, and credit-card prioritization remains elevated as well. Two, counterintuitively, debtors with higher credit scores were more likely to deprioritize mortgage payments to a greater extent than borrowers who were less creditworthy.
The implications for New York bankruptcy debtors are fairly clear. In normal times, most debtors need relief from credit-card debt, so whether chapter 7 or chapter 13 is right for them depends in part on how much equity is in their homes and what their income are. Debtors with depressed equity are probably better off in chapter 7, unless they want to strip the lien from an underwater junior mortgage.
The New York Fed’s blog post is here.
If you’re having difficulties repaying your debts, no matter what the kind, then talking to an experienced New York bankruptcy lawyer can help you assess your options. It’s better to seek help before you consider defaulting on your loans.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.