January 9, 2009
S. 61 - Senator Durbin's New Bankruptcy Bill
A summary of the bill is provided below:
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 of secured debts and abotu $330,000 of unsecured. Section 2 amends this provision to provide that the computation of of these debt limits does not include the secured or unsecured portions of debts secured by the debtor's principal residence, if:
First, the current value of the debtor's principal residence is less than the secured debt limit.
Second, 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.
In addition, section 2 amends section 109(h) to waive the mandatory requirement that a debtor receive credit counseling prior to filing a chapter 13 case where 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 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 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.
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Tracked on Sep 17, 2009 8:36:35 AM
It would be helpful if bankruptcy court judges were able to reduce the balance due on the loan for a principal residence. A larger number of homeowners may be able to afford the payment plan if this were the case.
Unfortunately, this still won't help the large number of borrowers who took out loans that they would never be able to afford. The easy credit sucked renters undeservedly into the mortgage market.
And by now, with so many people losing jobs and home prices declining in some ares by as much as 40-50%, I can only imagine the banks will be able to defeat any similar proposals... while they take hundreds of billions more from all of us in the form of future bailouts...
Posted by: Nick | Jan 9, 2009 11:25:39 AM
Thanks for the summary. It was worded better than a previous summary that I encountered.
Section 4 will help a lot of people be able to complete their wage earner plans and get back on track. Currently when loans reset that were made prior to the reset date, they endanger the likelihood that others can complete their intended plans. Preventing interest rate resets would do a lot to benefit homeowners. If reset is what led to their problems of financial insolvency, the wording is unclear to me if the rates would be reverted, the loan would be reset to its starting rate or if a new loan would be created for the present appraised value and the current conventional rate plus a reasonable risk premium.
This legislation may help many in its present form, however clarification and increasing the scope of reach would be much more helpful.
Posted by: Jim | Jan 9, 2009 4:06:49 PM
Bankruptcy Law is Federal Law, and recent changes in federal bankruptcy law went into affect October 17, 2005. It's had been in the works for years and finally has been signed into law. Does the new bankruptcy law prevent many older consumers from filing bankruptcy one could ask? Where can I find information on Alternatives to Court?
Posted by: Bankruptcy Alternatives | Jan 11, 2009 4:56:49 AM
The critical thing missing from this bill is letting the mortgagee keep a lien on the residence for the stripdown amount that is payable upon and only upon sale of the house. Otherwise this gives the bankrupt a windfall upon a later sale, which is absolutely outrageous.
Posted by: mark | Jan 12, 2009 9:33:56 AM
Great summary. Section 8 really doesn't clear up whether or not we can modify an already confirmed 13 plan to modify the Mortgage Contract. Plus some of the "chatter" on other blogs suggest that the debtors have make an effort to renegotiate before the court can entertain "reducing principal". We have got quite a few Confirmed plans that are paying 80/20s via "conduit" payments. The reason I am asking.
BTW I just put this blog as one of my favorites along with CreditSlips. Great Blog.
To "Bankruptcy Alternatives":
The 2005 "Bankruptcy Abuse Prevention and "Creditor" I mean "Consumer" Protection Act" makes you go to credit counseling before you file bankruptcy presumably to offer you alternatives. It's actually called a Pre-Bankruptcy Interview. That was the purpose, it just didn't actually work out like they wanted it to, housing mess and all.
Posted by: Patches | Jan 12, 2009 2:14:18 PM
(1) If there was borrower fraud in the origination of the mortgage loan (i.e. borrower lied about his income), would the loan still be eligible for modification? Would this be based on whether the court finds that the modification is in "good faith" under Section 6?
(2) Would the written down amount (i.e. cramdown) be an unsecured claim payable under the Chapter 13 plan along with the other unsecured debts, or would it be nonpayable during the plan period, or would it be completely written off?
Posted by: yf | Jan 26, 2009 12:41:10 PM
Pretty good summary and this is more helpful than previous. Thanks for sharing this post with us.
Posted by: Bankruptcy | Mar 23, 2010 9:56:48 PM
I stumbled upon this site in Google looking for information regarding this law. Thanks for posting! =)
Posted by: Stop Foreclosure | Sep 8, 2010 7:11:43 AM
Predatory lending is also a threat to deal with now a days. I am happy you wrote something worth reading about foreclosures. Foreclosure freeze for a wrongful foreclosure is a must. Lenders should explain terms and conditions in a simple manner to home owners. This would certainly decrease the amount of foreclosure fraud.
Posted by: Foreclosure Freeze | Jul 26, 2011 7:30:10 AM