For almost a year now, I’ve been closely following all the proposals for helping homeowners avoid foreclosure. It looks as if help is about to arrive. A proposed bankruptcy law, H.R 1106, also called the Helping Families Save Their Homes In Bankruptcy Act of 2009, has passed the House of Representatives and will be coming up for a vote in the U.S. Senate. This legislation 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. With ”cramdown” legislation in place, the bankruptcy system would become a much broader safety net.

Up until now, a home mortgage has been one debt the bankruptcy court was powerless to modify. If the new law passes, so long as bankruptcy judges can verify that homeowners tried to negotiate a voluntary loan modification with their own lenders, the judges would have the power to

a) Within federally approved appraisal guidelines, reduce a home’s value

b) Decide to lower the interest rate on the mortgage

c) Extend the term of the mortgage.

The way the law works now, a homeowner might file a Chapter 13 bankruptcy, entering into a three to five year debt repayment plan under the supervision of the bankruptcy court system. Every month, the regular mortgage payment would need to be made, plus a payment on the arrearage (back payments owed). Even though the bankruptcy might help with the second mortgage, the first mortgage payment and the arrears can be just too much to handle, and the home might be lost to foreclosure.

The new law, if it passes the Senate, would allow the bankruptcy judge to modify the mortgage payment, and there would be no arrearage to pay! You can see why, as a board certified consumer bankruptcy specialist, I consider this legislation so crucially important for my Indiana bankruptcy clients.

Stay tuned for more Mortgage Modification updates in days to come…