All the recent stimulus and bailouts made absolutely no changes to the bankruptcy laws. Clients constantly ask me when the “Obama Plan” will help them file bankruptcy and, for instance, reduce their mortgage payment. Unfortunately, it will not, because the Obama plan, all 400+ pages of it - which I read - does not mention bankruptcy at all. The Homeowner Affordability and Stability Plan Executive Summary makes a vague reference that bankruptcy judges should be allowed to modify certain home loans when all other avenues fail and the borrower has no other options. But that was just it - a mere suggestion that Congress may want to consider this issue at some point in the future - far from being law.
We know that the President does not make laws - laws are passed by Congress in a multi-step process that includes both the House of Representatives and the Senate. Each step involves various hurdles and opposing interests that the politicians must try to appease. The Bankruptcy Code is a thick federal statute, specifically Title XI of the United States Code, that can only be modified by an act of Congress, and not the President. As of this writing, NO CHANGES TO THE BANKRUPTCY CODE HAVE BEEN MADE SINCE PRESIDENT OBAMA TOOK OFFICE.
When will the changes be made? Proposed changes are being heavily pushed by consumer-friendly entities like the National Association of Consumer Bankruptcy Attorneys (of which I am a member), and heavily opposed by the banking industry. A small but important victory for consumers came recently when the House of Representatives narrowly passed a bill titled H.R. 1106 — a proposed law that upon passage in the Senate and approval by the President would finally allow bankruptcy judges to “cram down” (modify) the principal amounts and other terms of home mortgages in Chapter 13 cases after certain requirements have been met. However, the passage of this proposed law in the House is just the beginning of a long and possibly losing battle. The Senate companion bill, known as S.61, appears to be dying, lacking the needed support to gather enough votes to pass. Senate leaders just this week indicated that they will be focusing their efforts on revamping regulatory rules leading to more Federal oversight of banking practices. The changes to the bankruptcy code are not on the immediate agenda and may not reach the Senate floor any time soon.
Where does that leave consumers? The current bankruptcy laws already provide various degrees of relief, including ways to stop or delay foreclosure (see my article The foreclosure that never was), ability to catch up on late mortgage payments, an opportunity to get rid of a second mortgage (see my article Goodbye Second Mortgage!), or the ability to walk away from a piece of real estate without owing any deficiencies to the banks.
The author of this article may be contacted at the Law Offices of D. Lev, PC.
The power of bankruptcy is often misunderstood, or altogether unknown. Most think that a bankruptcy means “having to lose everything in order to pay your debts.” This couldn’t be further from the truth.
Today’s Bankruptcy is a set of federal laws that have the power to override certain state laws, contracts, and other financial arrangements. How exactly these federal laws affect each situation depends on the specific facts, and there is no uniform answer. But let’s talk about Massachusetts foreclosure as an example.
If you are at the end of your rope, and your mortgage lender is at the end of theirs, you likely received a notice of a foreclosure sale in the mail. If the notice came by certified mail and has a concrete sale date and time, that means that you’re probably past the initial threats, collection notices, acceleration and default letters, and phone calls from the bank. A sale date is the real deal. In most cases this means that the bank thinks it has exhausted all other means of resolving the situation, that it has already obtained the permission of the state’s land court to hold a foreclosure sale, and that it ran the advertisements as it is required to do in the local papers. You have a sale date. You have a foreclosure. You have a problem.
Bankruptcy to the rescue. Filing a petition in the United States Bankruptcy Court even one minute before the scheduled foreclosure sale will legally void any sale. Simply put, any transfer of ownership as a result of the scheduled foreclosure will have no legal validity. As a practical matter, it’s usually easier to have the petition filed at least a few hours, preferably a few days, before the scheduled foreclosure sale. In that case, once the bank’s law firm in charge of the foreclosure is notified, a sale would immediately be canceled and would not be held at all. FORECLOSURE STOPPED. Exhale…
But if the filing is truly last minute, or last second, the parties may not get notified in time to cancel the sale, however that sale will not be legally binding - it would be void, as if it never took place.
Does that mean that you could keep your house indefinitely without making payments? Unfortunately, no. Under the current laws, a bankruptcy does not fully take away the bank’s right to foreclose. It does, however, modify the bank’s rights. For starters, a bankruptcy will certainly delay any foreclosure at least long enough to see what other options may now be available with the help of the bankruptcy laws. In addition to delaying the foreclosure, a bankruptcy could:
- wipe out other unsecured debts, like credit cards and medical bills. With those bills gone, a family may be able to resume making mortgage payments and keep the house.
- force the bank to accept catch-up payments over a period of time up to five years. During this time, the bank is forbidden from trying to foreclose. The bank must sit bank and give the family a lengthy five year window to catch up.
- bring your attorney and the bank’s attorney together in a discussion that is likely to be more fruitful than the consumer trying to call the bank’s toll free “workout department” day and night, with infinite hold times and less-than-knowledgeable representatives.
Incidentally, if a bank were to disobey the federal bankruptcy laws and attempt to foreclose anyway, the Bankruptcy Court has the power to severely penalize the bank, potentially in the hundreds of thousands of dollars, and award that money to you. This is called a Violation of the Automatic Stay.
A bankruptcy is not always the cure for all financial ills, but it is also not the disaster that some mistakenly view it to be. At times, a bankruptcy is a blessing in disguise, especially when it allows a family to save their home from foreclosure. That power is there - even on a minute’s notice.
The author of this article may be contacted at the Law Offices of D. Lev, PC.
