John Morrell, managing partner at Higgs Fletcher & Mack (photo/alandeckerphoto.com)

Sometimes declaring bankruptcy can be the only way to forestall a foreclosure. One San Diego bankruptcy attorney says subprime financing can be a factor that helps push strapped borrowers into bankruptcy.

“It used to be without the subprime market, payments on an adjustable rate mortgage would rise gradually,” says John Morrell, managing partner at Higgs Fletcher & Mack. “Now it shoots up hundreds of dollars.”

The result is that mortgage payments go up fastest for consumers who have already shown they have the least ability to withstand an increase.

“The subprime market is aimed at people with less stable financial situations, erratic income, or bad credit which shows they’ve been in financial trouble before,” says Morrell.

The new code that went into effect last year makes bankruptcy less attractive, says Morrell, who started Higgs’ Chapter 11 practice in 1985. Debtors in bankruptcy can either file Chapter 7 to liquidate assets or file a Chapter 13 that stops the foreclosure and commits the debtor to make up defaulted payments over time. Under the new code, consumer debts fall under an inquiry about whether the debtor is making enough money to participate in a repayment plan. It is much tougher now, Morrell says, to get a discharge for personal debt.

— Rich Acello