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Homeowners and the Mortgage 'Cramdown' Bill

By Staff
The president's new housing plan could help an estimated nine million households avoid foreclosure. Those who don't qualify, however, may have no choice but to file for bankruptcy.

Trouble is, unless the mortgage "cramdown" bill -- which would allow judges to modify mortgages in bankruptcy court -- gets through the Senate, bankruptcy might offer little relief.

That’s because Chapter 13 bankruptcy, which reorganizes your debt into a payment plan that you can afford, doesn’t include the ability to modify a mortgage on a primary residence. (For more on the different types of bankruptcy, read here.

The Families Save Their Homes Act (H.R. 1106), the cramdown bill’s official title, would change all that. "The reason that a lot of people are not successful in a Chapter 13 bankruptcy is because they can't fix the problem that got them there," says Carey Ebert, president of the National Association of Consumer Bankruptcy Attorneys. "Their house payments are increasing because they either have an adjustable-rate mortgage or a subprime loan with onerous terms and they can't make house payments."

Ebert says removing the exception for primary mortgages is an important factor in improving the poor economic conditions resulting from shoddy lending practices. Indeed, despite many financial institutions’ moratorium on foreclosures, increasing numbers of homeowners are losing their homes.

As the bill is currently written, consumers would be able to get their mortgage modified in a Chapter 13 bankruptcy only after they've asked their lender for a modification first. Critics are concerned that the bill will promote bankruptcy as something other than a solution of last resort, but Ebert disagrees. "People are not going to be rushing out to file for bankruptcy," says Ebert. "It not fun -- there's a lot of stress involved."

The House recently passed H.R. 1106, but it has made little headway in the Senate. Proponents have managed to convince Citigroup (Stock quote: C) to support the measure, but industry leaders such as Bank of America (Stock quote: BAC) and JPMorgan Chase (Stock quote: JPM) have been slow to follow suit.

Ebert's not sure when the legislation will be approved, or even if it will be, but she’s certain a change has to be made to the current law. "If the house is worth way less than the loan, why would someone keep dumping money into a black hole?" she says. "That's the problem we have right now, and we have to fix it."

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