As a partner to the 2009 government-sponsored stimulus
plan, designed to jump-start a sluggish economy and offer relief to banks and
homeowners, Congress came up with a twist to the old bankruptcy law that might
stop foreclosures for some.
When a person files for Chapter 13 bankruptcy, traditionally the bankruptcy judge would order a cram-down on the person's private consumer debt liability, such as credit cards, automobile loans and other debts not secured by real property. This reduced the person's debts to a financial figure he could afford to pay. However, a bankruptcy judge was not allowed to order a cram-down on a home mortgage.
Things are changing. Congress and mortgage lenders know that although a personal residence is exempt from seizure during a bankruptcy suit; many homeowners lose their property soon afterwards because they cannot afford to pay the back notes plus any late fees and penalties that have been tacked on.
In a bold move to stop foreclosures, a bankruptcy judge may now order a cram-down on the mortgage, forcing the mortgage lender to refinance the home at the current fair market value. The benefit to the homeowner is that he will have a new mortgage, based upon the current value of his home and not the previous value.
This will allow many homeowners who are currently upside down in their mortgages, if they are in the process of taking out a Chapter 13 bankruptcy, to keep their homes at a reduced mortgage note and it may stop foreclosure.
There are caveats to this law, of course. If the homeowner sells the property within five years of the cram-down, he must split the proceeds with the lender at a ratio that is fair to both.
Nevertheless, in the short-term economic scenario, this new cram-down provision may stop foreclosure on many homes, allowing the bank to recoup some of its loss, keep the homeowner in his home and reduce the disastrous effect of numerous foreclosures on a sluggish economy.