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 sho7uld 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.
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 .
