All of us here at Bankruptcy Law Network file consumer bankruptcies, and we are all very excited by the prospect of the new bankruptcy law that will allow the modification of mortgages in Chapter 13. However, our excitement is fueled by the fact that it is the first real piece of legislation to help the middle class since the banks purchased passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
As has been discussed ad nauseum by my colleagues and I on this and other blogs, solving the housing crisis is undeniably the lynchpin to economic recovery. While we have been saying it longer than just about anyone, who disagrees at this point? So, let fix this problem once and for all.
Chapter 13 “personal reorganization” bankruptcy is really an inefficient tool to modify mortgages when you compare it to the simplicity of Chapter 7 “liquidation” bankruptcy. It costs debtors more money because their lawyers are forced to spend triple the amount of time and resources to successfully complete the process.
Additionally, Chapter 13 trustee’s require an administrative fee (usually as high as 10%) tacked on to the plan payments. Even though it appears the new law will allow the payment of the modified mortgage outside the Chapter 13 plan, you can bet the Chapter 13 trustee will find new ways to harass debtors to keep administrative fees flowing.
Under the new law, the mortgage modification will be “permanent” only after the completion of a 5 year Chapter 13 plan. However, the creation of a simple Motion to Modify Mortgage, which could be filed in Chapter 7, would streamline the modification of mortgages in this country, expediting the process by four and a half years!
Allowing the same modifications in Chapter 7 for debtors who otherwise qualify for Chapter 7 would reduce the necessary attorney time and eliminate exorbitant trustee fees, thus driving down the cost to consumers. The end result would mean greater numbers of successful mortgage modifications.
At the end of the day, what is Chapter 13? It is bankruptcy relief created for debtors who politicians believe are not deserving of Chapter 7. Keep this in the back of your mind as we continue bail out Wall Street and Detroit over the coming years.
America, it’s time to get real. While politicians play their fiddles in our nation’s capital, Rome is burning! Most of us have not ever lived through an economic catastrophe the likes of which will shape the next decade or so. While the current legislation is a baby step in the right direction, more can and should be done to save middle class homeownership.
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