On November 17, 2007, Sen. Richard Durbin [D-IL] introduced a new bankruptcy bill to the Senate to help struggling homeowners save their homes from foreclosure in bankruptcy. Its purpose is “to help struggling families stay in their homes and to ensure that taxpayers are protected when the Secretary of the Treasury purchases equity shares in financial institutions.“
This bill is presently in the first step of the legislative process. This means it must first go to committees that deliberate, investigate, and revise it before going to general debate. It is possible that the bill will never make it out of committee, although unlikely. The hope is that President elect Obama will sign this new legislation into law early near. Such a new law would essentially eliminate the long standing Supreme Court decisions of Dewsnup and Nobleman, which terminated the ability to modify first mortgages on residences.
Under current law and before this new legislation, only junior trust deeds can be removed from residences in Chapter 13 bankruptcy proceedings. First mortgages can not be removed at all or in part, nor are they subject to any sort of modification. In other words, a debtor can presently entirely eliminate a second mortgage from their home, but can not modify the first mortgage at all.
Ironically, however, if the property is not a debtor’s residence, but rental or investment property, a debtor is not restricted and can modify the first mortgage as well. For some reason, Congress in their infinate wisdom, thought that individuals with investment property need more creditor protection and mortgage modification rights, than individual homeowners about to be foreclosed upon. Apparently the wealthy investor needs more protection than the average American Family. Go figure.
Nevertheless, under the new proposed bill, a debtor would be able to not only eliminate junior mortgages entirely from the residence, but also reduce the principal balance of the first mortgage to the fair market value of the property.
To qualify, a debtor would have to pass an income and expense test very similar to the present budget test(means test) of the new laws. After passing such a test, the loan would then be reduced to the fair market value of the property, the balance spread over 40 years, and interest rate adjusted to a fixed annual percentage rate, in an amount equal to the most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk.
So keep your fingers crossed. It is very likely that soon millions of homeowners will soon be able to modify their mortgages with substantial principal reductions without being at the mercy of their lender’s discretion. Since such new bankruptcy laws in chapter 13 cases are the equivalent of Federal Court Orders, there is nothing the lender can do to prevent such modification, and must accept the new loan terms.
As most Bankruptcy Attorneys, Professors, and Economists agree, such new legislation will probably have far more impact on the current housing crisis and economy meltdown than any TARP or other bailouts proposed by the Government. Indeed, these and other similar Bankruptcy Reform Laws are gaining momentum since the House also recently passed similar legislation in HB 7307 as my colleague Jill Michaux has recently wrote about as well.
Written by Michael G. Doan
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