Given the current economic conditions, and significant decreases of home values across the country, we receive many telephone calls and inquiries from people who are struggling with their mortgage(s) in one way or another. Almost universally, people seem to be "upside-down" in their home, which is a common expression used to describe the situation where someone owes more on their mortgage (or mortgages combined, if they have more than one), than the home is currently worth.
For example, someone may own a single family home that is currently worth $100,000, but they have a mortgage with a balance of $150,000 (because back when this individual purchased this property, the property was worth $150,000 or more). In this example, the person is "upside-down" by $50,000. As a side note, it is this exact situation that is causing many Americans to simply walk away from their home, having decided that it is not worth paying on a piece of property that is simply not worth it.
The effects of this course of action are not addressed in this post, but will be at a later time. In addition to the devaluation of homes, the current economic conditions are compounding many people's financial problems because many people are currently facing reduced incomes due to temporary or permanent layoffs, a reduction in hours, a salary reduction, a termination of bonuses, etc., which has caused many home owners to fall behind in their mortgage due, simply, to an inability to pay their monthly mortgage amount. Many people in this situation will contact their mortgage lender to see if their lender will offer a modification.
Possible options include the Home Affordable Modification Program (HAMP)
which was put forth by President Obama, and is run through the U.S. Department of the Treasury
. Unfortunately, we do not see much success with modifications. In an article published by the N.Y. Times
in August 2009
, it is suggested that only 9% of all eligible individuals receive modifications (Andra Fuller, August 4, 2009, "U.S. Effort Aids Only 9% of Eligible Homeowners). These failures lead to the inevitable telephone calls to us as bankruptcy attorneys, from individuals wondering if a Chapter 7 bankruptcy or a Chapter 13 bankruptcy can help them save their home, since their lenders won't. There seems to be a bit of confusion out there about just what bankruptcy can or cannot do in relation to a mortgage, and this post attempts to clarify the issue.
Can a Bankruptcy Modify my Mortgage and reduce my Mortgage Payment?
The simple answer is "No," with one significant exception relating to second mortgages. For information on this exception, please see our prior blog post entitled "Eliminating a 2nd Mortgage."
Unfortunately, if you do not have a second mortgage, then there is currently nothing that bankruptcy can do to change your monthly payment.
It is worth noting, however, that, in an effort to tackle the ever-rising foreclosure crisis, there have been recent efforts on behalf of certain lawmakers, to change the bankruptcy code, and give bankruptcy judges the power to "modify" mortgages in a Chapter 13 Bankruptcy, by reducing the principal balance of the mortgage loan down to current market value of the house; this would be known as a "Mortgage Cramdown." Back in the Spring of 2009, U.S. House of Representatives Bill H.R. 1106, sponsored by Representative John Conyers, D-MI
, which was aimed at giving bankruptcy judges the ability to approve a "Mortgage Cramdown," was introduced and passed the U.S. House of Representatives. Unfortunately, due to heavy lobbying by banks and other financial institutions, this bill was later defeated in the Senate.
In December of 2009, a version of this same "Mortgage Cramdown" bill was appended to the Financial Services Regulatory Overhaul Bill, H.R. 4173, and came back up for consideration in the U.S. House of Representatives. Unfortunately, on December 11, 2009, by a vote of 188-241, this Bill failed to pass even the U.S. House of Representatives, again due to heavy lobbying by banks and other financial institutions. For more information, visit the National Association of Consumer Bankruptcy Attorneys's website (NACBA)
So where does that leave us? For now, the only changes to mortgages will be in relation to 2 nd Mortgages. With modification options failing, and the government's refusal to step in and right the ship, the foreclosure crisis is expected to continue and likely even pick up steam. It is widely hoped that some form of the "Mortgage Cramdown" bill will come back up for consideration in the future, but until then, foreclosures will continue.