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Disappointed foreclosed debtors facing financial challenges

Wisconsin debtors burned by illegal foreclosure proceedings may have been momentarily overjoyed that a $3.6 billion dollar settlement had been reached with several mortgage companies. However, that joy soon turned to disappointment when the sad reality sank in that after paying out to 4.2 million borrowers, the recovery was very minimal for most and offered little in terms of debt relief.

Federal banking regulators finally reached an agreement with several mortgage services for their illegal foreclosure proceedings that left many homeowners homeless and financially unstable. Some of the illegal foreclosure practices included foreclosing on active military servicemen, who are protected from foreclosure while on active duty, those not in default and those protected under bankruptcy to name a few. One couple whose property was wrongly foreclosed in the midst of a modification was excited to be a part of the settlement and was expecting anywhere from $6,000 to $125,000 but was disappointed when they received only $800 from the settlement. Some debtors are feeling violated by the system all over again as justice was not served in their eyes. Two thirds of the recipients received the lowest payout of $300, about 1,200 debtors got the highest amount of $125,000 and the remaining fell within a payout range of $400 to $7,500.

Foreclosed debtors struggling with financial challenges can still have hope of debt relief in spite of the minimal payout from the mortgage settlement. That hope is bankruptcy. Without a house to protect, most foreclosed debtors may opt for filing a Chapter 7 bankruptcy instead of a Chapter 13 bankruptcy. A Chapter 7 bankruptcy allows debtors to eliminate debt as opposed to a Chapter 13 that allows debtors to do a repayment plan on their debts. Under a Chapter 7 however, a debtor must meet certain income limitations for eligibility to file. Additionally, under a Chapter 7, debts can be eliminated within 60 to 90 days but under a Chapter 13, a repayment plan can extend the bankruptcy for several years until the plan is paid off.

Wisconsin foreclosed debtors who did not receive the debt relief they were expecting from the national mortgage settlement and even those facing general financial challenges can file bankruptcy as a viable means of debt relief. Whether a Chapter 7 or a Chapter 13 filing is right for individual debtors is a decision that should be made with that individual and a bankruptcy specialist.

Source: USA Today, "Foreclosure settlement a billion dollar bust," Julie Schmit, July 25, 2013