February, 2009:

The “Helping Families Save Their Homes in Bankruptcy Act of 2009” (the Act) will allow a Bankruptcy judge to modify the existing mortgage.  Although the details of how this will work will need to be ironed out after the bill passes, the basic concepts are not alien to bankruptcy judges or lawyers.

For years the courts have had the power to modify loans on property that is not the debtor’s principal residence.  No doubt the new law will work similarly.

Specifically, the Act will allow a Bankruptcy Judge to reduce the secured amount of the loan to the fair market value of the home.  Thus, if the house is only worth $250,000 but the debt is $300,000 the judge can reduce the secured portion to $250,000 and the debtor can treat the other $50,000 as wholly unsecured.   A debtor in a chapter 13 plan pays only a portion of her unsecured debts depending on several factors.  A likely scenario is that the debtor may only have to pay 5 to 10% of that $50,000.

Additionally, the Act will allow a judge to dictate a reasonable interest rate for the loan.  He will also be able to extend the term of the loan to 40 years from the normal 30. Both of these provisions will dramatically and substantially reduce the monthly payment amount.

All in all, the Act will save thousands, if not millions, of homeowners from losing their houses to foreclosure.