House Passes Mortgage Bankruptcy Bill

The House last Thursday passed a bill designed to reduce the burden on homeowners struggling to make their house payments. This bill gives bankruptcy judges the ability to modify mortgages for people who file for bankruptcy protection, including lengthening the payback period, reducing interest rates and principal payments.

The bill is entitled "Helping Families Save Their Home Act," but it is commonly referred to as the "cram down" bill because it enables judges to cram down the size of the mortgage. The bill as it is currently written requires borrowers and lenders to make a good faith effort to modify the mortgage before homeowners can ask the bankruptcy court to do so.

This cram down concept has been associated with bankruptcy for some time. In years past, it was often used to reduce the balance owed on car loans. Since October 17, 2005, when the Bankruptcy Code was last substantially revised, it has become more difficult to apply this concept to car loans. However, under the right circumstances it is still possible to cram down the balance owed on a car. I will blog more about this at a later date.

Using this concept as it relates to home loans will be a new power given to bankruptcy judges. For many homeowners who will not qualify for assistance under President Obama's Homeowner Affordability and Stability Plan, filing bankruptcy and utilizing this new power (assuming the Senate passes it and it is signed into law) may be the only option left to save their homes.

I will continue to monitor this situation. If the bill becomes law, I will post updates with additional information as it becomes available.