Bankruptcy

U.S. Senate Defeats Bill That Would Allow Bankruptcy Judges To Modify Mortgages in Chapter 13

By Jonathan Alper

The United States Senate defeated the proposal to permit bankruptcy judges to force modification of home mortgages in Chapter 13 bankruptcy proceedings. The bill earned 45 votes, far less than the 60 votes needed to cut off a potential filibuster. The bill had previously been passed in the House by a wide margin.. I have had numerous bankruptcy clients ask me in recent months if bankruptcy, Chapter 7 or Chapter 13, permitted them to make changes in their interest rates or mortgage balances. The answer is now clear. With the defeat of the mortgage modification bill, bankruptcy debtors are left with current Chapter 13 rules which permit judges to treat wholly unsecured second mortgages as unsecured debts to be paid pro-rata with other unsecured creditors. First mortgages must be paid without modification in the Chapter 13 plan.

The mortgage modification amendment to Chapter 13 bankruptcy has long been a dream of consumer advocates, and it has been opposed strongly by the banking industry. It is not clear if the bill?s defeat is due to politicians accepting the lender?s argument that passage will lead to increased lending risk and consequent higher interest rates for all, or if politicians feared the public would see the bill as another "bailout." Regardless of the reason for defeat, if this provision is not politically viable in today?s housing market and with the current liberal government in Washington, I expect that it will never become part of the bankruptcy law.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Full post as published by Florida Bankruptcy Law on April 30, 2009 (boomark / email).