Bankruptcy

Mortgage Relief in Bankruptcy?

By Richard K. Gustafson

Back in 2005 when Congress overhauled the bankruptcy laws, one of the provisions under consideration was a provision that would have allowed bankruptcy judges to rewrite residential mortgages based on the current value of the real estate.  That provision was dropped from the legislation under intense lobbying. 

In the wake of the recent economic downturn and record foreclosures, Senator Dick Durbin (D-IL) has brought this proposal back to life.  In fact, this idea was also one of the talking points of President-elect Obama’s campaign, so this time the proposal has a chance to make it into law. 

The law currently is that bankruptcy laws will not allow us to reduce residential mortgages down to the value of the property.  The Senate Finance Committee is currently debating this provision.  Under Senator Durbin’s proposal, bankruptcy judges in Chapter 13 cases could reduce the principal balance on a mortgage down to the present value of the property and the debtor in bankruptcy would be able to discharge the remaining balance as unsecured debt upon completion of the Chapter 13 plan.   

Let’s hope it makes it into law this time around!  It certainly would give everyday people a fighting chance to save their houses.  The mortgage relief legislation that has been passed to date relies on voluntary arrangements with the mortgage companies and does not, in my opinion, help the majority of people who are in trouble and find themselves in a house currently worth less than what is owed on the mortgage.

Full post as published by Consumer Bankruptcy Blog from Legal Helpers on November 20, 2008 (boomark / email).