MORTGAGE MODIFICATION IN BANKRUPTCY

The Law Office of
Susanne M. Robicsek
1701 Scott Avenue
Charlotte NC 28203
(704) 377-0776

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NC Bankruptcy Lawyer in Charlotte North Carolina for Chapter 7 / Chapter 13

MODIFICATION OF MORTGAGES
IN BANKRUPTCY CASES
While it makes such good sense to allow bankruptcy judges to oversee and regulate modification of mortgages, that isn't something that is supported by Congress.  For the life of me, I can't understand why since it makes such sense.  To the extent that I can, I will continue to fight for the right to do it.  See below for what many consumer advocates have done to change the laws.

I support modification of residential mortgages in bankruptcy but there is no law to allow it right now.   
 
However, if you are are in trouble with your mortgage, bankruptcy may still be able to help you.  Chapter 13 bankruptcy can stop a foreclosure and allow you to catch up missed payments over a three to five year period.  You also might be able to remove a second or third mortgage that is completely underwater in Chapter 13 bankruptcy.  In some cases, it is possible to eliminate second mortgages, equity lines and judgments against your home especially if your home has dropped in value in recent years.
 

WHAT IS MORTGAGE MODIFICATION?
 
A true mortgage modification will rewrite and change the terms of the loan.  Under the best circumstances, a modification normally looks to lower high interest rates, and possibly reset the payment term by spreading payments out over a different number of years.   It usually doesn't reduce the balance owed to the lender, although a lender certainly could do that if they wanted to.
 
Right now it seems nearly impossible to modify a mortgage despite the hype by the mortgage industry.  Many mortgages were sold to investors and by contract can not be modified easily.  With others, you can't find anyone with the power to make changes.  Modification departments are overwhelmed with requests, while Americans are loosing thier homes by the thousands.

WHAT IF THE LAW WAS CHANGED TO ALLOW MODIFICATION IN BANKRUPTCY?
 
If the law was changed to give US Federal Bankruptcy Judges the power to  oversee modifications, it would cut through the red tape and also provide judicial oversight.  Rather than loosing a house to foreclosure because the homeowner can't pay,  modification in bankruptcy would hopefully reset the mortgage to the fair market value of  the property, lower the interest rate, and change how long a borrower has to repay. Without modifications, many borrowers loose their homes only to watch it sold for less than what the homeowner would have been willing to pay to keep their home. 
 
The interest rate wouldn't be the best offered, but for many homeowners, lowerering interest from the highest rates may reduce the payments to an affordable amount.  The banks would still make a profit, maybe just not as much as they were wanted to get. 
 
However this is not a choice between being paid in full or less than that - it is a choice between making a reasonable profit or loosing a lot more when the house is sold for well below market value.  If the mortgages are modified at the fair market value, lenders will make more than they would if the house is sold at foreclosure sale prices.  Homeowners will be willing to pay more for the home then it will bring if foreclosed and they will be required under bankruptcy laws to pay the value of the house to the lenders. 
 
Modification of mortgages in bankruptcy is a win-win solution and puts some of the burden on the lenders, and at no taxpayer cost.   It also prevents other homeowners from watching their home values drop due to foreclosed houses bringing the market down.

There will be no free houses for people who qualifiy for modification, but famlies will remain in their homes, and people won't be living next to devalued or empty houses. The homeowner will own a house without equity but won't be so far underwater that they feel hopeless.  
 
This law, if passed, will prevent neighbors from having to live next to another house sold for fire sale price.   So this helps everyone, not just those who will modify their mortgages in bankruptcy.
 
THIS IS AT ZERO COST TO THE TAXPAYERS!  As a taxpayer myself, I am sick of backing bailouts to the lenders who helped get us into this mess with my tax money.
 
This law would only allow the modification of residential mortgages.  Other types of mortgages (non-residential) are already allowed to be modified in bankruptcy.  It would only apply in Chapter 13 bankruptcy which is a three to five year repayment plan that requires debtors to pay in as much as they can afford towards their debts.  This is no free ride for anyone, and people who couldn't afford the home would not be helped.  But for many families who just need a little extra help, it would save homes.  And that makes it worth changing the law.

As for mortgage modification in bankruptcy, Congress may reconsider the issue at some point in the future.  It is urgent to contact your Senator to encourage them to vote to allow modification of mortgages in bankruptcy.  To email your Congressman, click here to go to this government website to find your representative and fill out the form. 
I supported a 2009 Senate Bill S.61 which would have allowed modification of mortgages in Chapter 13 bankruptcy.  The House voted in favor of a similar bill.  Unfortunately, the Senate did not vote to pass the bill when they considered in the Spring of 2009, so you still can't modify a mortgage in bankruptcy, and an attempt in December 2009 also failed.  
Why modify mortgages in bankruptcy?
  • Zero cost to taxpayers 
  • While it reduces interest to lenders, lenders will still be paid higher interest than the best borrowing rates
  • No windfall for homeowners who will owe the full market value to lenders, and will have to start over building equity.  Most helped by this bill would be unable to stay in the home and walk away, leaving yet another home to fall to foreclosure or to sit vacant.
  • Best price to lenders, who will certainly receive more for the property from the current homeowners than if it was sold at foreclosure
  • Subject to judicial oversight by Federal judges who have been dealing with modification of all types of loans and are ready to oversee this process:  immediately
  • Streamlined, handled by lawyers, and subject to one set of Federal laws, rather than fighting through a maze paperwork at a mortgage company.
  • Residential home loans are the only loans not subject to modification now.  This provision dates back to the 1970s to encourage lenders to make home loans, but those loans were not of the type being offered now.  Those lenders lent responsibly, required down payments, made sure that the values of the homes were valid, and were fixed rates.
  • STABILIZES THE HOME MARKET TO BENEFIT ALL HOMEOWNERS
Equity, fairness, and balance are at the heart of this important solution to keep homeowners in homes and stabilize the housing market for all homeowners.
Modification of mortgages in bankruptcy would not allow people to walk away with a free house, would not reward bad behavior, and would not allow anyone who thinks they got a bad deal to refinance their house.  It would be supervised by experienced Federal bankruptcy judges, and all lenders will have the opportunity to contest any valuation and modification.  The lenders have excellent attorneys who provide checks and balances to the bankruptcy system. 
As a bankruptcy attorney who has clerked for a bankruptcy judge, and has respresented debtors, creditors and trustees, I fell blessed every day for the opportunity to work in a court of equity and fairness, where interests of all sides are weighed and balanced.  

1701 Scott Avenue Charlotte North Carolina 28203
phone: 704 / 377-0776
fax: 704 / 377-0775
DISCLAIMER: This message is intended as a general discussion of legal issues and not as a statement of fact, legal advice or a legal opinion. Personal opinions may also be expressed. No attorney-client relationship is created by this message. Do not act or rely upon law-related information in this communication without seeking the advice of an attorney licensed to practice in the relevant area.

The Law Office of Susanne M. Robicsek is
a Federally Designated Debt Relief Agency
under the Bankruptcy Code.
I file bankruptcy cases for people in financial need,
and have been doing so since 1989.

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