Bankruptcy Reform Can Assist Homeowners From Foreclosure

Chapter 13 bankruptcy reform is what is truly needed to
stem the time of the current foreclosure crisis. Even if
the code were modified for a short period of time, it would
give homeowners the opportunity to restructure loans that
are subject to or already in foreclosure. As the law
currently stands, a homeowner in Chapter 13 cannot alter
the contractual terms of their loan. A homeowner can repay
mortgage arrears over three to five years, however, the
post-petition mortgage payment must be made pursuant to the
original terms of the contract. Under several proposals to
modify Chapter 13 bankruptcy, a homeowner would be
permitted to restructure the loan.

For example, the loan can be reduced with regard to
principal, the rate of interest can be converted to a
fixed-rate, and the duration of the loan can be extended to
thirty years. This would effectively alter the loan so
that the homeowner has the opportunity to stay in the home.
Although the banking industry would vehemently object to
such restructuring, it is the banking industry that helped
create the current crisis. Under a revised Chapter 13
case, the mortgage company would receive the same of type
status as that of a conforming loan. The interest rate
would be no less than that of a conforming loan. The
length of the loan would be no less than that of a
conforming loan. In essence, the mortgage company would
have to bear some of the burden of the current crisis by
allowing homeowners to amend their loans.

Now this may seem like a drastic measure to force upon the
already decimated mortgage industry. However, if Chapter
13 cases could be modified, all parties will benefit in the
long run. First, homeowners would be permitted to save and
keep their homes. Second, the mortgage companies would be
paid an amount greater than what they would lose should
the property fall into foreclosure and subsequent sale.
Lastly, the communities would be protected against blight
and falling home prices if homeowners were allowed to
restructure loans through Chapter 13 bankruptcy.

It will be interesting to see if the proposed changes to
the bankruptcy code make it out of committee. There will
be a huge opposition from the banking industry. That same
industry spent over 8 years lobbying for the bankruptcy
reform act of 2005. I doubt that they will be willing to
give back one inch of the reform measures that they fought
so long and hard to obtain. It is also possible that the
big reform push may occur after the upcoming election. If
the Democrats retake the white house, more liberal reforms
will surely follow. I hope that homeowners can hang on no
matter who is elected.


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David M. Siegel is the author of Chapter 7 Success: The
Complete Guide to Surviving Personal Bankruptcy. He is a
member of the American Bankruptcy Institute and currently
practices bankruptcy law in Chicago and its surrounding
suburbs. Additional information is available at
http://www.chapter7success.com .