On Jan. 27, 2009, the House Judiciary Committee approved the Helping Families Save Their Homes in Bankruptcy Act of 2009 by a vote of 21-15, and reported it to the full House. The bill is expected to be folded into the 2009 Omnibus Appropriations Bill, slated for imminent consideration in the House. Introduced by Sen. Richard Durbin (D-Ill.), H.R. 200 delegates authority to bankruptcy judges to rewrite first mortgage terms by lowering the value of a mortgage to the current market value of the property, reducing interest rates and extending loan maturity.
The bill amends federal bankruptcy law governing a chapter 13 debtor (adjustment of debts of an individual with regular income). It excludes from the computation of debts the secured or unsecured portions of debts secured by the debtor’s principal residence if the current value of that residence is less than the secured debt limit or debts secured, or formerly secured by a debtor’s principal residence that was either sold in foreclosure or surrendered to the creditor if the current value of such real property is less than the secured debt limit.
The bill declares the credit counseling requirement inapplicable to a chapter 13 debtor who certifies that he or she has received notice that the holder of a claim secured by the debtor’s principal residence may commence a foreclosure on the debtor’s principal residence and requires the court to disallow a claim that is subject to any remedy for damages or rescission due to violations of state or federal consumer protection law, including the Truth in Lending Act, notwithstanding the prior entry of a foreclosure judgment.
The bill allows modification of the rights of claimholders, in the event of a foreclosure notice for a chapter 13 debtor, among other means by (1) reducing a claim to equal the value of the debtor’s interest in the residence securing such claim and any adjustments to a related adjustable rate of interest, (2) waiving early repayment or prepayment penalties and (3) extending the repayment period. It denies debtor liability for certain fees and charges incurred while the bankruptcy case is pending and arising from a debt secured by the debtor’s principal residence, unless the claimholder observes specified requirements.
The bill adds to conditions for court confirmation of a plan in bankruptcy that the holder of a claim secured by the debtor’s principal residence retain the lien securing the claim until the later of the payment of such claim as reduced and modified, or the discharge of a debtor from all debts and the plan modifies the claim in good faith. The bill excludes from final discharge of a debtor from all debts (1) any payments to claimholders whose rights are modified under the Act and (2) any unpaid portion of a claim as reduced.
Before the bill’s passage through the committee, several key amendments were made to the legislation. The “claw back” provision provides for a declining percentage of net sales proceeds to be paid to the cramdown lender if the house is sold during the pendency of the bankruptcy for more than the modified loan amount. The added provision for sharing of post-bankruptcy appreciation gives the affected lender 80 percent of the appreciation from a sale in the first year from the effective date of the plan, 60 percent in the second year, 40 percent in the third year and 20 percent in the fourth year.
Also added to the bill was a provision that the debtor must seek a mortgage modification directly from the lender at least 15 days before proposing a plan that modifies a mortgage. The lender presumably has an opportunity to negotiate a modification on its own terms before the bankruptcy court can impose a modification.
The bill was also amended before the bill’s passage by clarifying that only a major violation of the federal Truth in Lending Act would invalidate creditor claims during a bankruptcy proceeding. A further amendment made it clear that the bill would not change any obligations for loans backed by Veterans Affairs, the U.S. Department of Agriculture or the Federal Housing Administration, whose mortgages are fully insured against losses in foreclosure. A final addition amended the bill by limiting eligibility to mortgages originated before the bill’s enactment. The committee opted not to include a proposed amendment that would limit bankruptcy cramdowns to subprime loans.