Bankruptcy will not save your home from foreclosure. Many of the home owners whose primary residence are in foreclosure and filed bankruptcy in hopes of preventing the loss of their home were surprised to discover there is no help to be found in the bankruptcy code which was written back in 1978. There has been some bankruptcy code updates, unfortunately these were changes lobbied for and on behalf of the banking and financial industries. The changes instituted provide greater benefit for those industries rather than for their customers.
The revamped bankruptcy code of 1978 specifically prevents a bankruptcy judge from modifying the loan provision on a petitioner’s primary residence. The judge has the power to restructure the value and payment on all other debt, but not the debtor’s home. A 1993 U.S. Supreme Court decision reaffirmed a judge’s inability to tamper with an existing loan on a debtor’s primary residence. An investor who owns five houses has a right to restructure the terms of their debt on the investment properties, but would not be able to restructure the terms on the house where the family lives.
Chapter 7 bankruptcy offered debt relief for the consumer by wiping out most obligations not secured by property, such as credit card debt and medical bills. In 2005 after successful lobbying by credit card issuers and financial institutions, revisions were made to the bankruptcy code which made protections more restrictive. Since these bankruptcy code revisions were enacted most people in debt are now compelled to file for bankruptcy under the less accommodating Chapter 13 code. Chapter 13 protection usually only grant more time to repay the debt owed. It no longer eliminates existing debt and also still prevents bankruptcy judges from making changes to a mortgage contract.
This is the reality many of the home owners discovered when seeking bankruptcy protection to save their homes from foreclosure. As this nations’ pace of foreclosure continues to increase and it will, Trans Union, one of the leading credit reporting agencies, predicts by the close of 2009, 7.17% of all U.S. mortgages will be two months or more in arrears, more and more home owners will be faced with the harsh reality that bankruptcy grants no benefits in preventing foreclosure.
Unless some legislation is enacted to force banks to modify loans, property values will continue to be negatively affected, individual hoping to cash out of their home as they prepare for retirement will realize they can not afford to move, and state and local governments will find they are able to provide less and less community services as their local tax base erodes due to falling property values. Everyone will feel the pain. Even the financial institutions who advocated for tougher bankruptcy laws will be affected. They will find themselves over burdened with foreclosed properties and bad loans which they will never be able to collect on.
Congress and the Senate failed to amend laws during this session which would give homeowners more leeway to deal with the escalating foreclosure problem because of fierce opposition from the banking and financial industries. All solutions currently being considered would result in the banks losing some income. The American Bankers Association argues many of the changes recommended would increase the long-term cost of credit and reduce the number of individuals eligible to receive loans in the future.
There are a record number of struggling families facing escalating mortgage payment on a home where much of the value has already vanished along with their equity. They have run out of options to save their home and the one option many of them were counting on, bankruptcy, offers no assistance what so ever. What do you do now? Demand that your representative stop catering to the banking interest and enact legislation that grant their constituents relief.
Resource: Please, Judge, save My House – AARP Bulletin – January-February, 2009
Tags: foreclosure, bankruptcy, banking, home financing, home ownership