Kentucky Bankruptcy Law

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Helping Families Save Their Homes in Bankruptcy Act of 2009

H.R. 200, the Helping Families Save Their Homes in Bankruptcy Act of 2009, offers hope for distressed homeowners and is currently pending a vote by the House of Representatives. One of the most useful provisions of this bill, found in Section 4, would allow for judicial modification of loans mortgaged (secured) against ones principal place of residence. In fact, this bankruptcy tool could prove powerful enough to allow many to avoid filing Chapter 13 in order to save their home.

Currently, banks and other lendors have little incentive to renegotiate their loans with homeowners because they know that such secured home loans are not modifiable within bankruptcy. That is to say, if you are like most distressed homeowners your income is too high for a Chapter 7, your home is your largest debt, and your are thinking about a Chapter 13 primarily to save your home. Once in the Chapter 13 you are bound to the same terms on your home loan as got you into trouble before bankruptcy. So, negotiating with a lendor secured on your home pre-bankruptcy is much like David walking up to Goliath but without his sling and stones – all David can do is ask “pretty please” while Goliath just rolls over top of him. Sure, there have been some lendors who have offered short term accommodations for homeowners in trouble, but these accommodations have done little more than buy a few months reprieve against the inevitable foreclosure.

H.R. 200, on the other hand, puts that sling and stones back into David’s hands. If it becomes law, then lendors will be forced to calculate what terms they will end up with if the homeowner goes into bankruptcy and thus, it will make them more prone to negotiate terms to allow the homeowner to avoid bankruptcy. H.R. 200 would allow a home loan to be modified in substantial ways: 1) adjustable rate interest can be frozen during the repayment plan, 2) adjustable interest rates can be converted to a fixed rate, 3) the length of the loan can be extended by a number of years, and most importantly 4) allow for the secured part of the loan to be repaid while loan amounts over the value of the home are stripped down (treated as unsecured debts). One other substantial benefit to this legislation is Section 5 which limits fees and charges that can accumulate on the loan during bankruptcy.

I refer to the fourth item from Section 4 as “most important” because it directly impacts situations where the principal balance on loans secured by the house is greater than the value of the house itself. In days long past, one rarely saw this kind of “upside down” debt because lendors would not extend credit beyond the value of the home and home values generally rose each year. More recently, lendors loaned beyond the value of the homes and many home values have subsided. Without H.R. 200, a person entering Chapter 13 with a home valued at $100k but debt secured on that home of $125k would have to repay $125k. With H.R. 200 as law, he or she would only have to repay $100k and the remaining $25k would be treated as unsecured debt and potentially discharged at the end of the Chapter 13 plan.

Since lendors would know these various modifications would occur if the homeowner filed Chapter 13, you can imagine they would be inclined to cut a deal that preserved more of their interest but still made life feasible for the homeowner. One could argue that if the overhaul of the Bankruptcy Code in 2005 had not taken away that ability to “strip down” secured home loans, we might not be facing such a huge foreclosure crisis today. Home loan banks and other lendors are opposing this legislation and so it is crucial that you let your Senators and Representatives know where you stand on this bill.

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February 22, 2009 - Posted by | Bankruptcy

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