The House of Representatives has worked out a compromise on the bankruptcy provisions of the foreclosure Bill proposed by President Obama. In the original proposal, bankruptcy judges would have had the power to revise mortgage terms in a Chapter 13 bankruptcy proceeding. The bankruptcy term is a “cramdown provision”, since it allows the debtor to “cramdown” the debt to the current market value. The same concept is used all the time in bankruptcy, but cramdowns are specifically prohibited for the mortgage secured by a primary residence.
The compromise bill has weakened the original proposal, allowing only homeowners with existing loans to exercise the new provisions. Further, the homeowner is required to attempt a home loan modification before filing for bankruptcy. The attempted home loan modification requires submission of a financial information packet, not simply a phone call to the lender. The burden of proving that a workout was attempted will fall on the borrower. As many will tell you, even getting the home mortgage servicer on the telephone is a minor miracle. While the details of the process are still being worked out by most lenders, the hope is that the logjam for modifications will ease.
Before a bankruptcy judge can alter the original terms of the mortgage, the judge will be required to consider whether the homeowner was offered a reasonable loan restructuring deal first. Essentially, the judge will be required to weigh the revised mortgage terms to ensure they fit within the framework of the already implemented loan modification program. In other words, a judge will not be able to reduce the loan terms below 31% of the homeowner’s income, even if the property’s value has fallen even further.
Now the proposal moves to the Senate. If a Bill is passed by the Senate, a conference committee will be set-up with members of both houses of Congress. A final compromise bill will emerge from that conference committee for final passage by both houses. The President will then have the opportunity to sign the measure. Before that time, there is no change to current law which does not permit any revision of the loan terms for a primary residence in a bankruptcy.
