Foreclosure 911 & The Senate’s Failure
On April 30, despite the support of Senate Democratic leadership, the Helping American Families Save Their Homes Act of 2009 failed to pass.
The bill, which would have permitted bankruptcy judges to change the terms of residential mortgages, failed by a vote of 51 opposed, 45 in favor.
Senate Majority Whip Dick Durbin (D-Ill.) had previously said that a compromise amendment to the original House of Representatives bill had enough votes to pass the Senate, but in the end, permitting the renegotiation of home mortgages proved too objectionable to Senate Republicans, none of whom supported the measure (some Democrats didn't either).
Unprecedented levels of home foreclosures have fueled the current economic downturn, which in turn has forced more and more Americans to file bankruptcy.
Supporters of the bill believed that by allowing bankruptcy judges to alter mortgage terms, the cycle of foreclosure, recession and bankruptcy might be weakened.
The Current Law May Not Help Most
Under the current law, bankruptcy judges can reduce and even remove creditor claims in all forms of bankruptcy—except when the debt in question is secured by a primary residence.
Peter G. Miller, author and syndicated columnist, provides two illuminating examples in his recent column on the failure of the Senate measure.
Under the current law, a judge can modify the debt attached to a bankrupt debtor’s vacation home, yacht and private plane—assets the majority of Americans do not possess.
In contrast, the debt attached to a primary residence, a lynchpin in the finances of most Americans’, cannot be modified.
Lenders Opposed the Measure
While discussing removal of the home mortgage exception, Miller points out the recent concessions made by the United Automobile Workers in their negotiations with General Motors.
The union took a significant cut in wages and benefits, in many cases in exchange for company stock, and bondholders are being asked to make similar cuts. In this case, failure to negotiate concessions might lead to the failure of the company, a lose-lose situation.
Under the current law, mortgage lenders have no incentive to negotiate.
Supporters contend that the Helping Families Save Their Homes Act of 2009 would have promoted the power of the homeowner before and after filing a bankruptcy petition in court.
The measure, which was strongly opposed by lenders, would likely have encouraged creditors to work with debtors to reach a compromise mortgage adjustment, rather than take their chances in bankruptcy court where a judge could potentially set even less favorable terms.
This has not always been the case.
Miller points out that home mortgage lenders did not have special protections in bankruptcy courts until 1996, when the Supreme Court ruled that judges could not change mortgage debts under the Bankruptcy Reform Act of 1978.
The Foreclosure Fight’s Not Over
Senator Durbin, the measure’s chief sponsor, has said that he will not give up on the issue of bankruptcy reform.
More negotiations may lead to a compromise bill that can attract enough votes in the Senate, and in the current political and financial climate, there may be plenty of additional incentive for compromise.
Those facing foreclosure may choose to talk to a local bankruptcy lawyer about their options.