Can I File Bankruptcy If I Am a Loser in the ARMs Race?

Yes, but it won’t help.  Current Chapter 13 bankruptcy law does not allow you to change the interest rate, or the loan balance, on the mortgage on your residence.

National Association of Consumer Bankruptcy Attorneys President Henry Sommer proposes a solution here.

Most of the current version of Chapter 13 dates back to the 1978 enactment of the Bankruptcy Code.  Back then, today’s subprime and adjustable rate mortgages were not even a glint in the eye of the mortgage industry.

In states like Michigan, Chapter 13 worked well for auto workers and others who were laid off for a while, so they missed 3 or 4 or 5 payments, got called back to work, but could not make up the missed payments in a lump sum.  Chapter 13 gave them three years, sometimes longer, to catch up on those missed payments.

Now we have the perfect storm of falling home values, for the first time since the Depression, and rising mortgage payments, with something like 800 billion dollars of ARMs coming off the initial low teaser rates in the next year and a half.

This puts people in the position of having to make higher payments for homes that are worth less than when they signed the mortgage.  And current bankruptcy law does nothing to help.
Failure to act will result in more foreclosures, more homes on the market, further depressing home values.

But the proposed reform, as has been blogged about earlier on this site,  would allow people in that situation to re-write the mortgage on their residence to a fixed rate of interest, and lower the balance on the mortgage to the current market value of the home.

This lowering of the balance of the mortgage is already an economic fact.  The alternative for the mortgage companies is to foreclose, and re-sell, which will net them less than the market value that would be paid by allowing the homeowner to modify the mortgage through a Chapter 13 plan.

Let your Congresspeople know what you think.