Back at the end of 2007, I quoted an MSNBC article devoted to comparing bankruptcy and foreclosure in my blog titled Dis Or Dat? Foreclosure Or Bankruptcy?. I explained in that blog that a foreclosure is a very serious thing to mortgage lenders, even more serious than a bankruptcy. I went on to say that if a foreclosure is on your record, you’re probably going to have a lot of trouble when looking for another home or even when trying to rent a place to live.
As a bankruptcy attorney in Indiana for close to twenty-five years, finding a compromise with mortgage lenders is one of the things I work on with my bankruptcy clients, and I talked about that. I reminded blog readers that some forms of bankruptcy allow you to keep your home. Since each client situation is different, I stressed, designing just the right plan for each situation is what being an experienced bankruptcy attorney is about for me.
The point I want to make here is that, even though the two issues of foreclosure and bankruptcy are related, they have been totally separate legal issues. The bankruptcy court system did not have the power to modify mortgage debt obligations, and so any decisions I discussed with clients having to do with problem mortgages had to be made separately from the decisions about bankruptcy process. The law allowed bankruptcy to discharge your mortgage obligation but not modify or change the terms of the mortgage.
Well then, in March of 2008, I blogged about the proposed Mortgage Modification Bill. The idea that was being debated in the U.S. House of Representatives was to allow bankruptcy judges to modify the terms of a debtor’s mortgage loan and make it easier for debtors to avoid foreclosure. I pointed out the fact that the Mortgage Bankers’ Association had strongly opposed the bill, feeling that a dangerous precedent would be set if courts were given power to alter contracts after both parties had agreed to them. Efforts to pass that bill failed. Bankruptcy courts can deal with vacation homes, boats, and cars, but not the homeowner’s primary residence.
By December, 2008, Senate Banking Committee Chairman Chris Dodd was pursuing legislation to allow homeowners facing foreclosure to seek protection in bankruptcy court. With the change in the political landscape, the concept of bringing down the “wall” between bankruptcy and foreclosure was on the table once more (see Finally A “Fix” For Foreclosures?)
In the weeks since that blog was posted, foreclosures have continued to mount, and this month of January 2009 brought news that Democratic lawmakers have reached a deal with Citigroup, Inc. on a plan to allow bankruptcy judges to alter home loans. Other lenders are being urged to follow Citigroup’s example. The plan is to present the new foreclosure/bankruptcy tie-in as part of the Obama economic stimulus package. Let’s cross our fingers that the new law passes!