Dear Attorney,

I keep hearing about some new law that allows Bankruptcy Court judges to modify home loans. Did that ever go through?

Judy, Temecula

Dear Judy,

Folks in the Temecula Valley should pay particular attention to the bill you are asking about because this bill, if passed, will profoundly impact how you and your communities recover from the housing crises that hit this area as hard as or harder than most areas in the nation.

It will allow Bankruptcy Court judges to rewrite your loans using a process we refer to as a "cram down."

Cram downs are routinely used in Chapter 13 cases for automobiles when the debtor owes more than the auto is worth. In those cases, the amount paid to the creditor is reduced to equal the value of the security.

After reaching a compromise, the House passed the bill passed last week. It now moves on to the Senate, where a lot more opposition is anticipated. The legislation will be introduced to the Senate in the next two weeks.

If passed, this bill will offer real relief for borrowers whose home values are plummeting at the same time their payments are going sky-high.

Banks have vigorously opposed this bill from the start.

Without it, they don’t have to modify home loans. They could just continue to pretend to want to.

The Advertisement

[ Berry-Bell and Hall Mortuary ] bankruptcy bill is part of a broader package of relief for homeowners at risk of losing their homes, the details of which were announced by President Obama last week.

Obama’s $75 billion plan encourages lenders to rewrite loans so people can afford them. (What a concept.)

Without this legislation, Obama’s plan to rescue homeowners has no teeth; cooperation is entirely voluntary on the part of the lenders.

If this legislation is passed, lenders who fail to modify loans upon the request of homeowners risk greater losses in the form of court-ordered modifications which could reduce the interest rate, the principal balance, the length of the loan or all three.

While empowering Bankruptcy Court judges to hand down court-ordered modifications, the House version of this bill would be contingent upon the homeowner having attempted – and failed – to modify their loan by dealing directly with the lender in traditional modification negotiations.

To benefit from the bill, distressed homeowners would have to qualify for and file Chapter 13, and that’s not for everybody. Still, we expect a lot of folks who wouldn’t ordinarily file Chapter 13 to do so.

Simply put, if you view your lender as a big bully, you’ll probably view this bill as your "big stick."

If it passes, that is, and at this point nobody knows if it will.