Bankruptcy or foreclosure? You make the call

Which comes first – bankruptcy or foreclosure?

“That’s the same question as the chicken or the egg,” according to Sara Allen, executive director of Consumer Credit Counseling Service of Northern Colorado and Southeast Wyoming. “For people in financial difficulty, the two are very interconnected.”

That’s why agency counselors see a lot of crossover between avoidance counseling its two programs: Mortgage default and foreclosure and mandatory pre-bankruptcy counseling.

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“People usually come to see us when they are two to three months behind on their mortgage payments and are struggling to hold on to their house,” Allen said. “Some people call us when they have a job loss or the like and know they are going to fall behind, but there aren’t many of them.”

Lenders usually consider mortgage loans in default, and begin foreclosure proceedings, when payments are 90 days overdue.

“The farther past due payments are, the harder it is to catch up,” she said.

Many clients are referred to the U.S. Department of Housing and Urban Development-approved agency that Allen heads by the Colorado Foreclosure Hotline, or by the loss mitigation departments of lenders who work with delinquent borrowers on alternatives to taking back the house.

“Until the loan is in default, it’s handled by the collections department, who just want their money, so we don’t really see them any sooner,” Allen explained.

The number of clients using the services of the nonprofit CCCS, which are funded in part by HUD, has skyrocketed in the last year, so much so Allen is hiring an additional counselor for the Greeley office.

Between Oct. 1, 2005 and March 31, 2006, the organization provided 93 counseling sessions to help clients avoid mortgage default and foreclosure; one year later, the mortgage counselors saw 577 clients in the same six-month period.

Options available

Allen said that there are a wide range of options available, as long as homeowners aren’t too far behind on their loans. Of those 577 clients, 66 initiated a forbearance agreement or repayment plan with the lender; 46 brought their mortgage payments current; another 46 sold their property; 36 had their mortgage modified and 19 refinanced, while 27 sold the property at a pre-foreclosure sale, 65 had their mortgage foreclosed and 123 declared bankruptcy.

“We work with them, and let them know what options are available, but we don’t contact the lender for them,” Allen stressed. “They have to be invested in the solution.”

Of the total 2,284 clients who received education or assistance on all housing topics from Allen’s agency in 2006-07, 898 – 39 percent – earned less than 50 percent of the Area Median Income, and another 924 – 40 percent – fell between 50 percent and 79 percent of AMI. According to HUD, the 2007 AMI for Weld County is $59,800; for Larimer County, it’s $68,200 for a family of four.

“Most of our clients are working-class people with a difficult loan product who have suffered a divorce or job loss,” Allen said.

The question of whether declaring bankruptcy is a viable alternative to letting the house go into foreclosure is one best answered by an attorney, she said, adding that each client’s circumstance is unique.

“But bankruptcy doesn’t keep you from making those house payments,” she said. “If you couldn’t afford the house before, you won’t be able to afford it after.”

Offices throughout region

Consumer Credit Counseling Service employs eight paid housing counselors and two volunteers in offices in Greeley, Loveland, Longmont, Fort Collins, Sterling and Cheyenne, on a total annual budget of $950,000. Allen said the booming Wyoming economy and demand for scarce housing has kept counselors in Cheyenne less busy than their counterparts.

Agency counselors all have college degrees, and about half have a background in financial services. The other half, according to Allen, come with nonprofit counseling experience. All go through a yearlong training program to earn certification from the National Foundation of Credit Counselors, organized in the early 1990s in response to what Allen called “a number of questionable people” in the credit-card debt field. Because of the demand for services, counselors begin seeing clients within a month of hiring, but it is the employers’ responsibility to see that all counselors pass the certification test within a year.

“What our counselors do is provide a reality check, to help people see the truth about their income and expenses and what they have to do to make it work,” Allen said. “A mortgage is complicated, and our sessions are geared toward helping people see all their options. If they have no income, for example, they may have to sell the house quickly, but not too quickly to people who want to take advantage of their situation.”