The House Judiciary Committee approved an amendment in the nature of a substitute for H.R. 200 on January 27, sending the bill to the House floor where it may be attached to another measure for fast action. The bill is entitled "Helping Families Save Their Homes in Bankruptcy Act of 2009." The purpose of the bill is to provide a means through chapter 13 for a debtor to avoid a foreclosure and keep the primary residence. The bill is aimed at helping chapter 13 debtors who might have the means to afford their home, although they may no longer be able to afford their current mortgage. The core of the bill gives a bankruptcy judge in a chapter 13 case the discretion, within choreographed steps, to reduce the mortgage amount and alter other key terms on the principal residence, while partially protecting the lender in the event of a later sale after the property has appreciated in value. The bill is also intended to curb certain perceived abusive practices by lenders and servicers. Several key provisions of the bill include:
- A relaxation of the debt caps for individual debtors seeking relief under chapter 13 - ostensibly this would increase the universe of potential chapter 13 debtors who may invoke the other provisions of the bill (earlier versions of the legislation limited the bill's reach to subprime or other exotic mortgages, while the substitute applies to any type of mortgage);
- An exemption from the credit counseling requirement before one files a chapter 13 case where a foreclosure is pending - a sensible approach in light of the empty but significant ritual this requirement has become;
- An additional ground of claims disallowance for Truth in Lending Act violations that may have given rise to a remedy of rescission even if a foreclosure judgment has been entered - one might speculate whether the other disallowance provisions, including section 502(b)(1), might be sufficient;
- A change to section 1322 to allow the bankruptcy court to modify the terms and conditions of a loan secured by the debtor's principal residence in a chapter 13 case. This is the heart of the bill. It seeks to accomplish the goal of helping individuals retain their homes by bifurcating the mortgage into a secured claim equal to the current fair market value of the home and an unsecured claim for any difference from the existing mortgage. It then authorizes the court to impair the lien as it relates to the now unsecured portion of the mortgage. The court is also authorized to modify the interest rate and term length of the mortgage consistent with the prescription within the bill. Payments of such modified loans may be made directly to the holder of claim ("outside the plan") rather than through the trustee. Finally, the bill provides shared appreciation on a sliding scale, so that the holder of the mortgage may share in any proceeds upon the sale of the home so long as the sale occurs before the chapter 13 debtor receives his discharge. The bill also contains certain notification and certification requirements upon the debtor to contact mortgage servicers and attempt to modify the mortgage before being able to invoke these provisions. This is the thrust of the new complexity of chapter 13 practice and begets the question - if this is so good for the chapter 13 debtor, why leave the relief to him alone? Why not the chapter 7 debtor? Indeed, why only a debtor in bankruptcy as opposed to any borrower who owes more on a mortgage than the home is worth?
- A limitation of estate, debtor, and debtor property liabilities associated with costs incurred during the pendency of the case unless certain proof and disclosure requirements are met - a result buoyed by rather distasteful practices undertaken by some mortgage service providers that have come to light;
- The bill applies to all cases before, on or after the date of enactment. Thus a bankruptcy court could modify a confirmed plan in a pending chapter 13 case, or a debtor could dismiss and refile a case to take advantage of the new provisions.