Judicial Modification Key to Helping Homeowners

February 24, 2009

Last week President Obama announced an ambitious and expensive plan to stabilize home prices and help homeowners in trouble with their home loans avoid foreclosure.  The plan proposes incentives for investors and servicers alike to encourage loan modification even before homeowners default on their loans.  However, one key element of the administration plan costs the taxpayers very little but could provide extensive relief from foreclosure.

What is now being described as “Judicial Modification” is really the well known bankruptcy concept referred to as “Cramdown”.  The word does not appear in the language of bankruptcy code but this innovation emerged as a tool for debtors when the 1978 bankruptcy code was enacted by congress.  The term is used to describe the modification of creditors’ rights, against their will, when the negative impact on a particular creditor is substantially outweighed by the benefit to the debtor.

The Helping Families Save Their Homes in Bankruptcy Act of 2009 was introduced early in the 111th Congress (2009-2010) in both the House of Representatives as H.R. 200 by Representative John Conyers, a Michigan Democrat, and S 61 in the US Senate by Senator Richard Durbin, an Illinois Democrat.  This legislative proposal would lift a longstanding limitation contained in the bankruptcy code with respect to the rights of homeowners and residential lenders in a bankruptcy proceeding.

The bankruptcy code provides for modification of the rights of secured creditors in both Chapter 11 and Chapter 13 cases.  Under current law, a Chapter 13 plan is permitted to include, pursuant to 11 USC §1322(b)(2), language that will “modify the rights of holders of secured claims” with the express exception that no “claim secured only by a security interest in real property that is the debtor’s principal residence” may be so modified.

The White House proposes “careful” legislative changes that allow bankruptcy judges to modify mortgages written in the last few years when there are no other reasonable options for families with problem loans.  The proposed plan provides that:

“When an individual enters personal bankruptcy proceedings, his mortgage loans in excess of the current value of his property will now be treated as unsecured. This will allow a bankruptcy judge to develop an affordable plan for the homeowner to continue making payments. To receive judicial modifications in bankruptcy, homeowners must first ask their servicers/lenders for a modification and certify that they have complied with reasonable requests from the servicer to provide essential information. This provision will apply only to existing mortgages under Fannie Mae and Freddie Mac conforming loan limits, so that millionaire homes don’t clog the bankruptcy courts.

While the proposal is more limited than the current legislative initiative, it will cost the taxpayers relatively little by comparison with the many other investments being made by the Obama administration in an attempt to improve the economy.  As a bankruptcy lawyer, I have no doubt this portion of the Homeowner Affordability and Stability Plan will do a great deal to keep many families in their homes.

Usury and Subprime Home Loans

December 14, 2007

In the bankruptcy practice where I work, I increasingly see clients caught in financial binds caused by usurious home loans.  Oregon has an explicit exception to the Usury statutes limiting interest and fees charged on loans set forth in ORS 84.024 (4).  On the other hand, there are many state and federal statutes including RESPA and HOEPA which have provisions either restricting loan terms or requiring lenders to be explicit when disclosing the costs of a loan. When examining loan documents I sometimes find clear violations of existing laws, but far more often what surfaces is a contract which is legal, but unconscionable.

Usury, once associated with organized crime, has become institutionalized in credit-card lending, subprime home loans, and, increasingly, private student loans.  Home loans and easy credit have driven the economy for the last decade, generating obscene profits for banks and lending institutions.  Congress, meanwhile, adopted a laissez-faire attitude.  If it wasn’t obviously broken, no-one wanted to expend effort to fix it. Read the rest of this entry »

Bankruptcy is A Christian Idea

December 12, 2007

Bankruptcy in many ways is a Christian concept.  American bankruptcy laws have Biblical roots.  The seven-year waiting period between personal bankruptcies that was the law until 2005, for example, is based upon Deuteronomy 15:1-2

At the end of every seven-year period you shall have a relaxation of debts, which shall be observed as follows. Every creditor shall relax his claim on what he has loaned his neighbor; he must not press his neighbor, his kinsman, because a relaxation in honor of the LORD has been proclaimed

and Leviticus 25, which describes the regulations both for a seventh year Sabbath and a fiftieth year of jubilee. Read the rest of this entry »

A Real Free Credit Report!

December 12, 2007

When is a free credit report not free?  A credit report is not really free, or at least you could easily be charged for it, if you use one of the commercially advertised websites.  The television commercial advertising this service is really a for profit venture trying to sell you a service for a fee.  You must first give them your credit card information (if you have an active credit card) and to avoid a charge you must cancel the service within a specified amount of time.

To paraphrase my friend Jay Fleischman who writes in the New York Consumer Litigation Center Blog.  The three primary national consumer credit reporting companies are required by a federal law, the Fair Credit Reporting Act (FCRA), to provide you with a free copy of your credit report, at least once every 12 months if you ask for it. Read the rest of this entry »

Earned Income Credit Fully Exempt in Oregon

November 15, 2007

As explained in a recent article arguing in favor of a federal exemption for the Earned Income Credit, the federal credit, created by 26 U.S.C. §32 (1994), is a refundable tax credit provided for low income workers who have dependent children and who maintain a household. A low income taxpayer can get the credit, in the form of a check or automatic deposit into a bank account, even if the amount of the refund is larger than the amount of tax paid that year.

In Oregon we have an exemption specifically protecting the Earned Income Credit and keeping it entirely exempt from exectution by a debt collector with a judgment.  This exemption also applies to the trustee in a bankruptcy case.  Read the rest of this entry »

Airline Miles Offered for Private Student Loans

November 12, 2007

I have an airline sponsored credit card I use to buy things.  Why not?  I earn airline miles and I don’t buy anything more than I would have with cash, debit card or check.  I pay the balance in full on the credit card each month and never pay any interest.

However, not everyone is as careful in the way they use credit cards as I am.  After nearly 30 years as a bankruptcy lawyer, I have a healthy respect for credit and use it carefully.  This wasn’t always the case.  Back in my student days, when money was tight, I would occasionally use my credit card less carefully and without paying attention to the cost of the credit.  Read the rest of this entry »

Bankruptcy Modification of Home Loans

November 12, 2007

Bankruptcy allows change of loan terms for loans on many types of real estate.  The reason this power is given to the bankruptcy courts, is that a bank or other lender would only recover the value of the property if it went into foreclosure.  By changing the loan terms to give the lender the same amount of money it would get if it foreclosed, the borrower would get to keep using the property without any loss to the lender.  The technical term for this process is called, believe it or not, “cramdown”.

Congress allows cramdown of the loan balance to the property value in three types of bankruptcy cases.  A cramdown can be ordered in cases under chapters 11, 12 and 13. Read the rest of this entry »


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