In 2005, Congress enacted the “Bankruptcy Abuse Prevention and Consumer Protection Act” (“BAPCPA”), which by all accounts was a very lopsided piece of legislation. The bill was pushed heavily by the credit industry (yes, the same banks that are sucking billions of dollars from the U.S. Government in bailouts) as a means of preventing what the industry believed were “abusive” bankruptcy. In return, the bill also included some “consumer protection” measures which have resulted in very little benefit to the filing consumer. The entire piece of legislation has simply caused more work for attorneys, trustees and bankruptcy courts, but has done very little to satisfy the later-half of its title “Consumer Protection.” A new piece of legislation, the “Helping Families Save Their Homes Act of 2009” appears to be a large step in the right direction for consumers and debtors in bankruptcy, and for the first time in several years, actually appears to be headed towards passage.
The concept which have been put forward in H.R. 1106 — the “Helping Families Save Their Homes Act of 2009” are not new. The bill aims to create a mechanism by which Bankruptcy Court judges can impose a modification of a homeowner’s mortgage on their primary residence to help them avoid loss of their home, and has been put forth in the last several sessions of Congress. It is only now that we are in the midst of one of the worst housing and economic crises does this legislation appear to be headed towards passage. To understand why this has been on bankruptcy attorneys’ radar for several years, you have to appreciate an odd hypocrisy that is contained in the Bankruptcy Code today. In a chapter 13 bankruptcy today, a debtor can seek modification of certain secured and unsecured debts. A chapter 13 is, by definition, a repayment plan, however, rarely do debtors actually repay 100% of what they owe on unsecured debt. The balance not repaid is discharged and cannot be collected by creditors at any time in the future. Similarly, on secured obligations, such as vehicle loans, furniture loans, and even mortgages on certain types of properties, the amount owed can be judicially modified to something less than the full amount owed. That, however, is not available on the one asset that today represents the biggest hurdle to financial solvency for most consumers — their primary residence mortgage. Although attorneys have been successful in “stripping” liens from a primary residence, it is generally only where the loan in question is wholly unsecured (in other words, the value of the home is less that the first mortgage, so the second and subsequent liens can be stripped, or reduced to unsecured debt), there is no uniform mechanism for a judge to modify an interest rate, a loan term or principal amount. H.R. 1106 and its companion bill in the Senate, S. 61 seeks to correct this discrepancy in consumer bankruptcy.
The provisions of the “Helping Families Save Their Homes Act of 2009” includes a number of limitations that seek to prevent abuse by those not truly in need of the Court’s assistance. The first, and perhaps biggest hurdle for a homeowner is that in order to obtain this relief, you must not only file bankruptcy, but you must commit to and complete a chapter 13 plan of repayment. After the passage of BAPCPA, a chapter 13 repayment plan is a very daunting task, and requires that the homeowner submit to the court virtually every penny of the net disposable income every month for between three and five years. Failure to complete the plan means the judicial modification of your mortgage is undone, and the homeowner is back to square one, though there is a provision which would allow a home to be sold while in bankruptcy, however, depending upon the timing, the homeowner may not get the full benefit of the modification imposed by the Bankruptcy Court.
As of the writing of this post, the bill has been passed by the House of Representatives. Its companion in the Senate has been referred to committee for review, however it has not yet been reported back to the Senate. There is a great deal of pressure from the White House for this bill to move forward as it is a keystone of the President’s housing recovery program. We will keep you posted as more news develops. Write, call or email your Senator to encourage them to move this bill along, as it has the potential to save tens of thousands of homes that do not need to become bank-owned garbage. To see if your state Senator is on the Committee currently reviewing the bill, please go to the GovTrack.us website here to see current Senate Committee on the Judiciary Assignments.
David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.