Monday, February 15, 2010

Give Homeowners Real Help - Reform Bankruptcy Laws

What is Bankruptcy Reform?
Why Do We Need It?

A consumer files a Chapter 13 bankruptcy to reorganize his debts. That reorganization may include catching up on past-due child support, student loan, mortgage or car payments and wiping out some credit card and medical bills.

If for example, your auto was purchased for 40,000.00 and the outstanding balance is 30,000, but the car is only worth 20,000, a bankruptcy judge will routinely reduce the amount owed to 20,000 – the value of the car, if the borrower can meet certain conditions.

Sounds pretty simple? It can be. What needs to be changed and why?

Unlike most commercial transactions, and unlike automobiles and vacation homes, residential mortgages on the debtor’s principal residence cannot be modified in bankruptcy. Unlike the example of the depreciated car given above, a consumer may not reduce (or change in any way) the terms and conditions of his/her mortgage on the principal residence.

What changes are needed?

Simply put: consumers should be able to change their mortgage loans in bankruptcy court. Robert Reich, economic advisor to President Clinton, put it this way…
The best way to help reverse this downward slide would be to let bankruptcy judges restructure shaky home mortgages, reducing what borrowers owe. The problem is, the big banks hate this.

Frequently asked Questions

Why isn’t mortgage loan modification unfair to the lender?

Lenders are already modifying loans. The process is slow, inefficient and inequitable. This would provide a streamlined process with guidelines applicable to every consumer across the country and with every lender. Some lenders say it is not fair to modify the bankruptcy laws after they have given the loans. This is just a ruse. Business is used to changing laws. Tax laws change every year. Business adjusts. Consumer protections change regularly – business adjusts. This is an adjustment that will be good for consumers, good for the economy and ultimately, good for lenders.

Won’t people who can afford to pay take advantage of these provisions just to get a better deal?

No, just the opposite will happen. In order to get a Chapter 13 plan approved by the Court, the consumer /borrower must prove she is insolvent, i.e. that she owes more than she owns in assets. She must also prove that the Chapter 13 repayment plan is feasible (that she can actually make the payments) and that the plan is proposed in good faith ( no assets or income have been hidden from the Court.) If the bank suspects lack of good faith, or lack of true hardship, it can deny a voluntary modification and the consumer will think twice before swearing in court to false information.

Why should you have to file bankruptcy to get this simple relief from foreclosure?

That is the beauty of court-ordered loan modification. Once the banks know and accept that you can file bankruptcy to get a modification, they will conform their voluntary practices to the court rules and regulations. There will be no incentive to deny modifications.

What effect will court-supervised modification have on the overall economy?

Right now, uncertainty paralyzing consumer spending and business investment is the biggest enemy to economic recovery. One of the main causes of that uncertainty is the inability to accurately assess the value of residential real estate, or to predict how far real estate prices will fall. With court supervised modification, assessing the value of real estate will become easier, more transparent and more uniform. The Courts are used to the process of quickly and fairly evaluating property pledged as collateral for debt.

Who opposes court-supervised modification?

Lenders. Although lenders dread court-modified modification, it is actually good for their industry. Banks are doing a mediocre job of responding to the tsunami of families facing foreclosure. Documents are lost, standards are constantly in flux. Banks are not in business to modify loans. The time, energy and financial commitment currently being spent on loss mitigation should be focused on making new loans and collecting outstanding ones. That is what banks do best. Lenders will benefit from more certainty in the market. Most Republicans also oppose bankruptcy relief for homeowners.

Suppose the market for residential real estate comes back. Is it fair for consumers to reap the benefit of the recovery, leaving lenders out in the cold?

Congress could limit the amount of the write-down of the principal balance. Or it could require that the property have lost a minimum value before the provision would apply. Or it could require the lender to share in any appreciation that occurs in the future if the property is sold or transferred at death. Very conservative members of the financial community have called for court supervision.

Who supports court-supervised modification?

Center for Responsible Lending
Rainbow PUSH Coalition
Congressman Barney Frank
Senator Whitehouse
Congressman John Conyers
Senator Chuck Schumer
President Barack Obama
Economist Robert Reich
Senator Dick Durbin

Why hasn’t bankruptcy reform, or court-ordered modification passed?

Congress has not passed it.

What can I do to help?

Contact your Senators and member of Congress.