Homeowners are the only ones who cannot modify the terms of their secured debts in bankruptcy. Corporate America flocks to bankruptcy courts to do precisely this – to restructure and reamortize loans whose conditions they find onerous or can no longer meet. Airlines are still flying and auto-partsmakers still operating because they have used this powerful tool of the bankruptcy process. But when the bankruptcy code was adopted in 1979, the mortgage industry persuaded Congress that its market was so tightly regulated and conservatively run that it should be exempted from the general bankruptcy rules permitting modification.
12.02.2008
Reform Bankrupcty Law
(via Auntie) READ Judge Leonard'st op-ed in the CSM on how reforming bankruptcy law would help solve the mortgage crisis. By allowing individuals to reorganize their crazy loans in bankruptcy, people can stay in their houses and the lenders will get more than they would in a foreclosure fire sale. Seems reasonable to me ...
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From a knowledgeable bankruptcy person:
I agree with much of the article. However, accomplishing this is not so simple. First, you would have to have Congress amend the Bankruptcy Code (something which Obama will attempt to do in the first few months of his presidency). Second, what standards should/would bankruptcy judges be guided by in deciding who or who is not an appropriate candidate for loan modification?(that is, to some degree the bankruptcy judge would have to make judgment calls about whether borrowers were somehow "taken" by unaffordable ARMs, or were simply unwise consumers (and, in many cases, dreamers not duped, but thinking they could afford a house they actually could not). Third, if judges permit home loans to be "stripped down" (i.e., unsecured portion really not collectable), who will ultimately bear that cost? New borrowers, the lenders, the government? Fourth, what about freedom of contract? Fifth, even if modifications to home loans could be made, many Chapter 13s still fail because the debtor's economic conditions are so bleak that they (routinely - - trust me) default again on their mortgage obligations during the Chapter 13 plan. So, modification is no guarantee to the debtor's success. Should it be? And, sixth, the proper interest rate to choose is NOT a simple one - - see the Supreme Court's decision in Till, along with subsequent case law and commentary.
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