Going to the well one more time for bankruptcy reform

Its that time of year again — time to consider when and how to reform the Bankruptcy Code.

Specifically, should the bankruptcy code be amended to allow judges to force creditors to accept “cramdowns” — forced modifications — on first mortgages on a debtor’s house?

This idea has been floating around for years now, and has never really gotten off the ground. With a big turnover in Congress in the last election, it would be a little surprising, to say the least, to expect much positive reform from the newly installed Congress.

But at least one elected official, U.S. senator Jeff Merkley from Oregon wants to try. He has been speaking very loudly about the need for the current Congress to amend the Bankruptcy Code to allow cramdowns of first mortgages on primary homesteads. The same proposal was attempted by Senator Dick Durbin from Illinois back in 2009, but failed.

Senator Merkley’s proposed legislation is comprehensive. It will allow a homeowner to save their homes by reducing the principal to what the house is actually worth, and would also allow the homeowner to craft a financial plan to deal with all of their debts under the Bankruptcy Judge’s supervision. Accordingly, there will be no unfair and deceptive dealings. Everything will be in the open, and the homeowner will not have to live in fear of losing everything that they have ever worked for. As if they haven’t lost enough already.

Merkley’s plan contains another component: he wants to implement a refinancing option to provide homeowners facing foreclosure the option to refinance at current rates and home values.

One of the most important provisions in the Merkley plan would suspend foreclosures while the mortgage modifications were being considered. You never, and I mean never, find anyone who sends in their mortgage modification documents one time and gets an immediate decision. They may be out there, but I haven’t heard about them. More typical are individuals who sent in their paperwork multiple times.

We can only hope Sen. Merkley’s idea gains some traction with the new Congress. Failing that, a lot of folks are going to get mighty frustrated filling in HAMP applications that are bound to be rejected.


By Doug Beaton

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