Bill Introduced To Permit Chapter 13 Debtors To Modify "Upside Down" Home Mortgages

Democratic congressman introduced this week a bill (H.B. 7307) to change Chapter 13 bankruptcy law to permit homeowners to modify the terms and principal balance of their home mortgages. This change in the law would mean that people whose mortgages are "upside down" can by filing Chapter 13 bankruptcy cram down the principal balance to their home’s current market value. The bill would also permit reduction of some relatively high interest rates. Obama expressed his support of this change in bankruptcy law during the campaign.

Proponents of the bankruptcy law change argue that the cram down provision in Chapter 13 will help solve the real estate mortgage crisis. Bankruptcy courts, bankruptcy attorneys, and Chapter 13 trustees provide an existing structure to modify a large number of problem real estate mortgages. The federal bailout to date has not made a significant impact. Opponents of the law, including the mortgage lending industry, state that permitting borrowers to write off mortgage principal when their home values decline increases the lender’s risk of future mortgage loans, and that the lender will pass on their risk by raising mortgage rates and tightening credit standards.

In my opinion, a compromise might change the law temporarily to help stabilize the housing market, but establish a firm expiration date of the new cram down law in order to minimize the increased risk to the lending industry and possible effect of the availability and cost of future real estate mortgages.

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