New Bankruptcy Legislation May Help Home Owners Keep Their Home

"Main Street's dreams were dashed on Wall Street" has been an oft-used refrain by observers and pundits when speaking about how the economic backbone of our nation—its homeowners—are suffering as a result of irresponsible lending fueled by a cash bubble of exotic mortgage-backed securities that few understand to this day. The good news is that help is on the way and it’s from your Main Street bankruptcy lawyer. Here’s how:

In its first weeks of session, Congress will be considering legislation (sponsored by Rep. Brad Miller of North Carolina and Sen. Richard Durbin of Illinois) that would permit courts to restructure (or "cram down") mortgages on principle residences in Chapter 13 Bankruptcy. A Chapter 13 Bankruptcy is also called a "wage earner’s plan," which enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors petition the court with a repayment plan to make installments to creditors over 3 to 5 years.

Curiously, current bankruptcy law allows courts to modify every type of secured debt, including car loans and mortgages on second homes and vacation homes—except primary homes. This legislation corrects this anomaly while providing much-needed relief to homeowners who now owe more than their home is worth.

Clearly, programs that were supposed to help prevent foreclosures either through voluntary efforts by the banks or government agencies have fallen horrendously flat: it has been reported that the two major programs designed to help homeowners in this regard (Hope for Homeowners and FHASecure) have signed up a total of 4,457 homeowners. To put that in perspective, Credit Suisse recently estimated about 8.1 million families will lose their homes in foreclosure over the next four years, and as many as 10.2 million could lose their homes to foreclosure if the recession becomes more severe. Real-world help for people in need can be found in bankruptcy court and its process for achieving the objective of keeping owners in their homes.

The legislation before Congress, known as the "Emergency Homeownership and Equity Protection Act," would apply where a debtor’s principal residence is being threatened with foreclosure. It allows the court to modify the rights of a mortgagee (the lender) with respect to loans made prior to the date of the bill’s enactment, by reducing the principle amount of the first mortgage if the value of the home is less than the full amount of the debt; prohibiting, reducing, or delaying any adjustable interest rates applicable on and after the date the case is filed; extending the repayment period of the mortgage for up to 40 years; and providing for the payment of interest at an annual precentage rate calculated at a fixed annual rate equal to that used for conventional mortgages, plus a reasonable premium for risk.

Will this legislation create a tidal wave of new bankruptcy filings? Yes. Will it be a boon to Main Street lawyers who practice in this area? Yes. Will mortgage rates rise to reflect this increased risk of modification? Maybe. But all that pales in relation to the objective of helping over 10 million homeowners remain in their homes and thereby keeping the world’s largest national economy afloat.

• This article is provided for informational purposes only. If you need help with a Bankruptcy click here to consult with Jeffrey Binder or a Bankruptcy Attorney in your area.