Sunday, January 11, 2009

Will New Bankruptcy Law Save Your Home?

Senate Bill 61 (Durbin)


Section by Section Summary

Section 1. Short Title. Section 1 sets forth the short title of the bill as the “Helping Families Save Their Homes in Bankruptcy Act of 2009.”

Section 2. Eligibility for Relief. Bankruptcy Code section 109(e) sets forth secured and unsecured debt limits to establish a debtor’s eligibility for relief under chapter 13, currently equal to just over $1 million. Section 2 amends this provision to provide that the computation of debts does not include the secured or unsecured portions of debts secured by the debtor’s principal residence, under certain circumstances. First, the exception applies if the current value of the debtor’s principal residence is less than the secured debt limit. Second, the exception applies if the debtor’s principal residence was sold in foreclosure or the debtor surrendered such residence and the current value of such residence is less than the secured debt limit. Without this provision, many struggling homeowners in high-cost areas such as California would be ineligible for relief.
In addition, section 2 amends Bankruptcy Code section 109(h) to waive the mandatory requirement that a debtor must receive credit counseling prior to filing for bankruptcy relief, under certain circumstances. The waiver applies in a chapter 13 case where the debtor submits to the court a certification that the debtor has received notice that the holder of a claim secured by the debtor’s principal residence may commence a foreclosure proceeding against such residence.

Section 3. Prohibiting Claims Arising from Violations of Consumer Protection Laws. Section 3 amends Bankruptcy Code section 502(b) to disallow a claim that is subject to any remedy for damages or rescission as a result of the claimant’s failure to comply with any applicable requirement under the Truth in Lending Act or other applicable state or federal consumer protection law in effect when the noncompliance took place, notwithstanding the prior entry of a foreclosure judgment.

Section 4. Authority to Modify Certain Mortgages. Section 4 amends Bankruptcy Code section 1322(b) to permit modification of certain mortgages that are secured by the debtor’s principal residence in specified respects. The modification authority applies in a chapter 13 case where the debtor’s principal residence is the subject of a notice that a foreclosure may be commenced. New section 1322(b)(11) allows the court to modify the rights of a mortgagee by: (1) providing for payment of the amount of the allowed secured claim as determined under section 506(a)(1); (2) prohibiting, reducing, or delaying any adjustable interest rates applicable on and after the date the case is filed; (3) extending the repayment period of the mortgage for a period that is no longer than the longer of 40 years (reduced by the period for which the mortgage has been outstanding) or the remaining term of the mortgage beginning on the filing date of the case; and (4) providing for the payment of interest at an annual percentage rate calculated at a fixed annual percentage rate equal to that used for conventional mortgages as published by the Board of Governors of the Federal Reserve System, plus a reasonable premium for risk.

Section 5. Combating Excessive Fees. Section 5 amends Bankruptcy Code section 1322(c) to provide that the debtor, the debtor’s property, and property of the bankruptcy estate are not liable for a fee, cost, or charge incurred while the chapter 13 case is pending and that arises from a debt secured by the debtor’s principal residence, unless the holder of the claim complies with certain requirements. These requirements consist of the following: (1) the holder files with the court an annual notice of such fee, cost, or charge (or on a more frequent basis as the court determines) before the earlier of one year of when such fee, cost, or charge was incurred or 60 days before the case is closed; (2) the fee, cost, or charge is lawful under applicable nonbankruptcy law, reasonable, and provided for in the applicable security agreement; and (3) the value of the debtor’s principal residence is greater the amount of the claim, including such fee, cost or charge. If the holder fails to give the required notice, such failure is deemed to be a waiver of any claim for fees, costs, or charges (as described in this provision) for all purposes. Any attempt to collect such fees, costs, or charges would constitute a violation of the Bankruptcy Code’s discharge injunction under section 524(a)(2) or the automatic stay under section 362(a).
Section 5 further provides that a chapter 13 plan may waive any prepayment penalty on a claim secured by the debtor’s principal residence.

Section 6. Confirmation of Plan. Section 6 amends Bankruptcy Code section 1325(a) to provide certain protections for a creditor whose rights are modified under new section 1322(b)(11). As a condition of confirmation, it requires a plan to provide that such creditor must retain its lien until the later of when the claim (as modified) is paid or the debtor obtains a discharge. In addition, the court must find that the modification is in good faith.

Section 7. Discharge. Bankruptcy Code section 1328 sets forth the requirements for discharge. Section 7 amends section 1328(a) to clarify that a claim modified under section 1322(b)(11) is not discharged to the extent of the unpaid allowed secured portion of the claim.

Section 8. Effective Date; Application of Amendments. Section 8(a) provides that the Act and the amendments made by it, except as provided in subsection (b), take effect on the Act’s date of enactment. Section 8(b) provides that the amendments made by the Act apply to cases commenced under title 11 of the United States Code before, on, or after the Act’s date of enactment.

This appears to be the problem: it seems to be limited to future foreclosures, not present foreclosures, or foreclosures already started and pending:

It excludes the majority of homeowners who struggle with adjustable rate mortgages, predatory lending loans, and unaffordable upside-down-the-property-is-not-worth-as-much-as-the-loan loans. It excludes people who are already in foreclosure or have been in foreclosure and had their case dismissed by a scrupulous judge who demanded to see proper loan documentation or have had default judgments entered against them but have not been removed from the property.

S. 61 only protects those people who have a claim for a loan secured by a security interest in the debtor’s principal residence “that is the subject of a notice that a foreclosure may be commenced”.

“May be commenced” does not cover has been commenced. “The subject of a notice” does not cover those who are not the subject of a notice, those who have not been threatened with foreclosure but have been subjected to every other type of collection harassment, including work out scams, and phony loan modifications that add unnecessary fees, but do little to lower the monthly payment or interest rates.

This bill only serves those people who receive a notice that they might be sued for foreclosure. Arguably, Congress knows that foreclosures are a problem and if Congress wanted to apply this bill to existing foreclosure cases she could have stated so in clear and unambiguous words.


Should I File Bankruptcy Now if the Law is Going to Change?
By Nicholas Ortiz, Boston Bankruptcy Attorney on Jan 31, 2009 in Bankruptcy Protection & Automatic Stay, Chapter 13 Bankruptcy
Congress is debating a change to Chapter 13 of the Bankruptcy Code to allow homeowners with “negative equity” in their homes to reduce the amount owed on their mortgages to the amount of their home’s value. This is the “cram down” legislation, which has failed on many occasions due to the the banking industry’s strong opposition. However, the political and economic environment now gives it a fighting chance. Indeed, even Citigroup has signed on and supports the legislation.

Consequently, someone with negative equity who is facing foreclosure or just overwhelmed by debt might wonder if they should wait and see if the law passes before they file. The answer to this depends on need, of course. If help is needed now, then there may be little choice. The good news, however, is that for most people already in bankruptcy, if the new law passes they will be able to dismiss their pending Chapter 13 case and re-file a new one. There are two primary issues to be aware of when doing this.

1. When dismissing a Chapter 13 case, one must make sure that the 180-day bar to refiling does not go into effect. This bar can arise due to a willful failure to obey court orders, but it usually is implicated after a debtor seeks dismissal after a motion for relief from stay has been filed. If a motion for relief has been filed, often the best way to deal with the problem is simply to wait for the trustee to make a motion to dismiss for failure to make plan payments. If the dismissal enters as result of the trustee’s request, not the debtor’s, there is no 180-day bar to re-filing.

2. The other main issue relates to the imposition and preservation of the automatic stay in the new case. If a new law passes, a debtor will usually have filed only their current case within the last year. If this case is dismissed and re-filed, the stay will only last 30 days in the new case. However, if the debtor’s attorney goes to court within 30 days of filing the new case and ask for a continuation of the automatic stay to show that it was filed “good faith as to the creditors to be stayed” the stay will be continued. The focus of judges at these hearings tends to be simply to decide whether the new case will work. When a case is re-filed to take advantage of a new law, but is otherwise fundamentally sound, this test should be met. The standard gets much tougher when the new case is the third (or fourth, etc) in one year. In these circumstances, dismissing and re-filing is likely a bad idea.

The bottom line is that filing a case now will usually not deprive a debtor from taking advantage of whatever legislative changes may come in the future.


Present Bankruptcy Law Affords You Some Mortgage Relief: Cramdowns and Lienstripping

The Automatic Stay of Bankruptcy ( not so automatic if you had a bankruptcy case dismissed before within one year)

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