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Chapter 13 bankruptcy may help Massachusetts economy

At the end of 2012, 22 percent of all homebuyers were underwater on their homes, meaning that they owed more in mortgages than what their homes were worth. While people in Massachusetts would be happy to know that this is an improvement over previous years, there is a long way to go. In a stronger housing market, only 5 percent of all homeowners will owe more on their mortgages than the value of their homes.

While not everyone who is upside down on his or her home necessarily will need to reduce debt, filing for a Chapter 13 bankruptcy may be the best option for those who are facing financial difficulties aside from a high balance on their mortgages and a low home value.

Unlike a Chapter 7 bankruptcy, which can only delay a foreclosure, a Chapter 13 can actually stop foreclosure and allow a debtor to make regular payments to satisfy both a delinquent mortgage and other debts. Moreover, for those who have more than one mortgage on a home that has declined in value, it is possible that a debtor may effectively get complete relief from a second or third mortgage once that debtor completes his or her payment plan.

One side benefit to a Chapter 13 bankruptcy is that it may help stimulate the economy. While there is much attention on the growth in the stock market in this respect, according to a recent study, home prices in fact have a bigger impact on the overall economic picture.

Relatively speaking, Americans have little money invested in stocks and mutual funds. Comparatively, they have far more tied up in their homes. Thus, when home prices fall or remain stagnant, Americans in Massachusetts and elsewhere may feel the pinch and tighten their belts in order to reduce debt. Lower consumer spending in turn hurts the prospects of economic recovery.

A Chapter 13 could help a family grow equity in their home and thus play a small role in improving the economic fortunes of both Massachusetts and the rest of the country.

Source: CNN Money, "Why Americans still feel poor," Nin-Hai Tseng, Jan. 25, 2013

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