Nothing is easy. Homeowners are suffering. They need help. Congress wants to help them by cutting their mortgage payments.
The catch – they have to file a case under chapter 13. And then what happens? As a result of the reduced monthly mortgage payments, the borrower will have more disposable income. Will that help? Not necessarily.
The Chapter 13 trustee will probably decide that the reduced disposable income should not be used to help the borrower with his life. Instead, the Chapter 13 trustee will probably argue that this disposable income should be paid to him, in order to allow the debtor’s creditors to be paid under the chapter 13 plan.
Now, it is understandable that the mortgage lender whose mortgage has been reduced now has a big unsecured claim. And the debtor also probably has lots of other debts – like credit card debts.
But everyone needs to understand that there is no free lunch. The mortgage might be reduced but the cash out from the debtor to pay his bills will be no less than it ever was for the 3 to 5 years the debtor is required to stay in Chapter 13.
So don’t let anyone believe that Congress’ Helping Homeowners Save Their Home in Bankruptcy Act of 2009 is a giveaway or a free lunch. Hardly. It is an effort to let homeowners use sweat equity to keep their homes while honorably paying back as much of their debts as they can over a 3 to 5 year period.
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