Bankruptcy Judges Should Have the Power to Modify Mortgages

The sagging home values are drawing attention to a gaping hole in bankruptcy protection, the ability for U.S. bankruptcy judges to be able to modify the terms of a mortgage to keep people in their homes that want to pay.

A couple of recent article really caught my eye, “Delahunt: Empower judges to modify mortgages” and “A Win-Win Bankruptcy Reform“.

Bankruptcy judges have the power to change the term of loans for vacation retreats, business and car loans, but no authority to keep you in your home. Silly.

Homeowners facing trouble today or headed to foreclosure will often file bankruptcy to stop the foreclosure on their home. But that won’t save the home if you can’t afford the mortgage.

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Under existing law, bankruptcy courts cannot modify the terms of home mortgages. To keep her home, this debtor needed to demonstrate sufficient income not only to make her ongoing payments at 14 percent but also to cover, during her five-year repayment plan, the payments she had defaulted on. Her proposed plan was clearly not feasible based on her salary, so I had no choice but to lift the stay and allow the foreclosure to continue.

However, homeowners could easily be allowed to remain in their homes if the loans were modified either in length or to return the interest rates charged back to a fair and reasonable amount.

When mass foreclosures occur, as they are now, nobody wins. The homeowner, banks and investors win if they can keep the proud and emotionally attached homeowner in the property, making payments, and properly caring for the home. This allows neighborhoods to flourish that would otherwise have vacant and unkempt bank REO homes just sitting there.

If we can’t give bankruptcy judges the authority to modify these loans in specific situations and under specific guidance then who can we trust to do the right thing, lenders?

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This gap in bankruptcy authority seems to be perpetuated because the mortgage industry feels it would be detrimental to the mortgage industry but I have to agree with Judge Leonard when he writes:

No one has been able to explain to me why it is not better for mortgage holders to get a fair return of principal back, albeit at a lower interest rate, than to take a lump sum through foreclosure that is probably much less than the value of the note.

It does not make sense.

Not allowing bankruptcy judges to have authority to modify mortgage terms only tosses people out on the street. People who will eventually get new mortgages when the economy improves.

It seems that the costs passed on to us, the consumers are not because mortgage defaults, but because logic does not prevail.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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