Mortgage Modification in Bankruptcy May Soon Be Possible

21 Nov Mortgage Modification in Bankruptcy May Soon Be Possible

A Senate Judiciary Committee hearing, chaired by Senator Richard Durbin of Illinois, took another look at proposed bankruptcy legislation to permit modification of loans secured by the personal residence of the debtor by a bankruptcy judge. There have been many articles published on this site dealing with important legislation. As I said in my prior article “Congress Could Save Your Home From Foreclosure,” a change in bankruptcy law is by far the most efficient way to protect homeowners from foreclosure.

Voluntary programs proposed by the Mortgage Bankers Association are not being used by home loan servicers. Many of the major banks have promised to modify distressed loans. That would be a great solution. In fact, if the home loan were modified by the lender, there would be no need for bankruptcy court intervention.

According to Senator Durbin, only 3.5% of the distressed home loans are being modified on a voluntary basis by the lender. Michael Calhoun, president of the Center for Responsible Lending agreed with the acting chair that banks are not being reasonable in their pursuit of a non-foreclosure solution to default by the homeowner.

Professor Adam Levitin of Georgetown Law Center destroyed the arguments of the Mortgage Bankers Association. Professor Levitin has published an excellent paper entitled “The Effect of Bankruptcy Strip-Down on Mortgage Markets” in which he demonstrates that the argument made by the mortgage industry that allowing bankruptcy modification will increase the costs to consumers is just plain wrong.

Even if the present congress fails to modify the law this reluctance may soon change. As one of my colleagues, Carmen Dellutri, said in his recent article President Elect Obama – Congratulations – Please Amend the Bankruptcy Law. This was one of candidate Obama’s promises. Many homeowners are counting on the new president keeping this campaign promise. It may be the only way for them to keep their home.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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