Wherever there are stimulus plans, it seems, there are acronyms, and the proposed new bankruptcy law on mortgage modifications is no different. In referring to the Helping Families Save Their Homes In Bankruptcy Act of 2009, which has passed the House of Representatives and will be coming up for a vote in the U.S. Senate, just say HASP. HASP stands for Homeowner Affordability and Stability Plan, and it gets that name because the goal is to enable qualifying homeowners refinance or modify their mortgages.
As a bankruptcy attorney in Indiana, I’ve been following all the different proposals for more than a year now. Meanwhile, of course, the number of foreclosures has escalated dramatically. what is different about the latest proposed “fix” is allowing bankruptcy courts to get directly involved in the solution to homeowners’ mortgage-related financing problems. Up until now foreclosure and bankruptcy were handled as separate issues, with bankruptcy judges having no power to change mortgages.
The newest legislative proposal is called “cramdown”, because it would allow bankruptcy judges to “cram down”, or reduce, a mortgage, as well as payments on the mortgage, to match the current market value of the home. New powers judges would have include:
a) Reducing a home’s value
b) Lowering the interest rate on the mortgage
c) Extending the term of the mortgage.
My work as a consumer bankruptcy specialist has always involved issues of foreclosure. Many of my Indiana bankruptcy clients during the past twenty-plus years have chosen to file Chapter 13 bankruptcy specifically to avoid losing their homes. The way the system has functioned up until now, the homeowner might file a Chapter 13 bankruptcy, entering into a three to five year debt repayment plan. The plan typically includes the regular mortgage payment each month plus a “make-up” payment to catch up on payments that were missed in the past. Often there’s a second mortgage, too.
The problem, of course, is that with home values having dropped so dramatically and so many people having been laid off their jobs, making a first mortgage payment plus a “catch-up” is too much for most people who are facing overall financial problems.
That’s why I’m so excited about the prospect of a new bankruptcy law. If the bankruptcy part of HASP passes in the Senate, allowing bankruptcy judges to modify mortgages, there won’t be the need for “catch-up” payments. I consider this legislation crucially important for all Indiana bankruptcy clients.
Stay tuned for more new bankruptcy law mortgage modification updates…