A Growing Burden of Home Debt

CREDIT counselors are finding that mortgage debt is playing a bigger role in the deteriorating financial health of consumers contemplating bankruptcy.

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In a survey released last month by the National Foundation for Credit Counseling, a nonprofit group representing 115 counseling organizations, the average person receiving financial advice before filing for bankruptcy in the last year earned ,000 annually and had ,500 of unsecured debt spread over eight credit cards.

Over the first six months of that 12-month survey period, consumers receiving counseling had, on average, ,000 more in unsecured debts but nearly ,500 more in annual income.

"Consumers are upside down financially," said Susan C. Keating, chief executive of the foundation, which is based in Silver Spring, Md. "Those who are considering bankruptcy have unsecured debt well in excess of their annual income."

Ms. Keating said the survey did not track the specific dollar amounts of mortgages and other debts that are secured by assets like property, but she said many counselors reported that their clients were delinquent on their mortgages, with some reporting that 100 percent of their clients were delinquent.

The organization's counselors, who can be found through the Web site DebtAdvice.org, had reported a brisk increase in the number of clients who are concerned about the rising costs of their adjustable-rate mortgages in particular, she said.

These mortgages, also called ARMs, feature an initial interest rate typically locked in for three to five years, after which the rate changes in accordance with prevailing short-term interest rates. Those rates have climbed in recent years, leaving borrowers with ARM loans vulnerable to sharply higher monthly mortgage payments.

"Mortgage debt is coming out as much more significant than we expected," Ms. Keating said. "Pull this all together with the other unsecured debt people have, and this is really problematic." The foundation, she added, will intensify its attention to mortgage counseling over the next year, partly in anticipation of more demand from consumers whose home loans are growing more burdensome.

The foundation has been surveying its members to gauge the effects of a federal bankruptcy law signed last year, which, among other things, eliminated some benefits of personal bankruptcy filing.

Ms. Keating noted that 98 percent of the clients who receive foreclosure-prevention education from a foundation counselor ultimately avoid foreclosure. Counselors have succeeded in large part, she said, by helping consumers understand their loans and create budgets.

But according to Craig Focardi, an analyst with TowerGroup, a financial industry consulting firm, federal bankruptcy laws passed last year could also help make it less likely that banks will push for foreclosures when consumers become delinquent with mortgages.

Mr. Focardi said that under the new bankruptcy law, secured creditors like mortgage lenders "have to share more of a debtor's income with credit card, automobile and other consumer lenders that hope to increase collection recoveries" in a bankruptcy proceeding.

As a result, Mr. Focardi said, mortgage lenders are more likely to help consumers stave off bankruptcy by setting up payment recovery plans, because they may stand even less of a chance of getting repaid if the consumer declares bankruptcy now than they did under the previous laws.

"Under the new law it's harder for borrowers to file Chapter 7, which enables them to extinguish their debt," Mr. Focardi said. "Instead, they have to set up repayment plans even for credit cards. So it lengthens the amount of time borrowers are delinquent on their mortgages and could increase the lender's total loss on that defaulted loan."

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