Bankruptcy Laws and Mortgage Debt

While many industry experts agree that there are some positive indications found in the slowing foreclosure trend, many others point out that the road to recovery is still far in the distance. While the bankruptcy process has been able to help many people avoid foreclosure and regain control over their mortgage payments, there is still room for improvement in the mortgage industry.

Modifying Mortgages

Mortgage modifications are one option for avoiding foreclosure outside of bankruptcy. Typically allowing for a borrower to lower their payment through a reduction in principal, interest rate or the extension of the life of the loan, modifications can be successful for many people experiencing trouble with mortgage debt. However, they are also notorious for being difficult to obtain; as many lenders are often unwilling to approve borrowers.   Even with help from Fannie and Freddie, and even government programs such as Home Affordable Modification Program (HAMP), many borrowers are finding themselves with few options.

In efforts to better alleviate the mortgage crisis, there has been a push in Congress for the revision of bankruptcy laws. Currently, bankruptcy can alleviate mortgage debt by stripping second mortgages, penalties and rolling missed payments into a Chapter 13 plan. However, the new push is for an expansion of the bankruptcy the laws to also allow for a federal bankruptcy judge to restructure first mortgages, including rate and principal reductions, in Chapter 13 cases. A revision of the laws would essentially allow for a judge to act as an arbiter to  (a) set fair and equitable principal reductions based upon current market conditions; and (b) restructure mortgage payments based upon a homeowners’ actual ability to pay.