What
is
Bankruptcy
Reform?
Why
Do
We
Need
It?
A
consumer
files
a
Chapter
13
bankruptcy
to
reorganize
his
debts.
That
reorganization
may
include
catching
up
on
past-due
child
support,
student
loan,
mortgage
or
car
payments
and
wiping
out
some
credit
card
and
medical
bills.
If
for
example,
your
auto
was
purchased
for
40,000.00
and
the
outstanding
balance
is
30,000,
but
the
car
is
only
worth
20,000,
a
bankruptcy
judge
will
routinely
reduce
the
amount
owed
to
20,000
–
the
value
of
the
car,
if
the
borrower
can
meet
certain
conditions.
Sounds
pretty
simple?
It
can
be.
What
needs
to
be
changed
and
why?
Unlike
most
commercial
transactions,
and
unlike
automobiles
and
vacation
homes,
residential
mortgages
on
the
debtor’s
principal
residence
cannot
be
modified
in
bankruptcy.
Unlike
the
example
of
the
depreciated
car
given
above,
a
consumer
may
not
reduce
(or
change
in
any
way)
the
terms
and
conditions
of
his/her
mortgage
on
the
principal
residence.
What
changes
are
needed?
Simply
put:
consumers
should
be
able
to
change
their
mortgage
loans
in
bankruptcy
court.
Robert
Reich,
economic
advisor
to
President
Clinton,
put
it
this
way…
The
best
way
to
help
reverse
this
downward
slide
would
be
to
let
bankruptcy
judges
restructure
shaky
home
mortgages,
reducing
what
borrowers
owe.
The
problem
is,
the
big
banks
hate
this.
Frequently
asked
Questions
Why
isn’t
mortgage
loan
modification
unfair
to
the
lender?
Lenders
are
already
modifying
loans.
The
process
is
slow,
inefficient
and
inequitable.
This
would
provide
a
streamlined
process
with
guidelines
applicable
to
every
consumer
across
the
country
and
with
every
lender.
Some
lenders
say
it
is
not
fair
to
modify
the
bankruptcy
laws
after
they
have
given
the
loans.
This
is
just
a
ruse.
Business
is
used
to
changing
laws.
Tax
laws
change
every
year.
Business
adjusts.
Consumer
protections
change
regularly
–
business
adjusts.
This
is
an
adjustment
that
will
be
good
for
consumers,
good
for
the
economy
and
ultimately,
good
for
lenders.
Won’t
people
who
can
afford
to
pay
take
advantage
of
these
provisions
just
to
get
a
better
deal?
No,
just
the
opposite
will
happen.
In
order
to
get
a
Chapter
13
plan
approved
by
the
Court,
the
consumer
/borrower
must
prove
she
is
insolvent,
i.e.
that
she
owes
more
than
she
owns
in
assets.
She
must
also
prove
that
the
Chapter
13
repayment
plan
is
feasible
(that
she
can
actually
make
the
payments)
and
that
the
plan
is
proposed
in
good
faith
( no
assets
or
income
have
been
hidden
from
the
Court.)
If
the
bank
suspects
lack
of
good
faith,
or
lack
of
true
hardship,
it
can
deny
a
voluntary
modification
and
the
consumer
will
think
twice
before
swearing
in
court
to
false
information.
Why
should
you
have
to
file
bankruptcy
to
get
this
simple
relief
from
foreclosure?
That
is
the
beauty
of
court-ordered
loan
modification.
Once
the
banks
know
and
accept
that
you
can
file
bankruptcy
to
get
a
modification,
they
will
conform
their
voluntary
practices
to
the
court
rules
and
regulations.
There
will
be
no
incentive
to
deny
modifications.
What
effect
will
court-supervised
modification
have
on
the
overall
economy?
Right
now,
uncertainty
paralyzing
consumer
spending
and
business
investment
is
the
biggest
enemy
to
economic
recovery.
One
of
the
main
causes
of
that
uncertainty
is
the
inability
to
accurately
assess
the
value
of
residential
real
estate,
or
to
predict
how
far
real
estate
prices
will
fall.
With
court
supervised
modification,
assessing
the
value
of
real
estate
will
become
easier,
more
transparent
and
more
uniform.
The
Courts
are
used
to
the
process
of
quickly
and
fairly
evaluating
property
pledged
as
collateral
for
debt.
Who
opposes
court-supervised
modification?
Lenders.
Although
lenders
dread
court-modified
modification,
it
is
actually
good
for
their
industry.
Banks
are
doing
a
mediocre
job
of
responding
to
the
tsunami
of
families
facing
foreclosure.
Documents
are
lost,
standards
are
constantly
in
flux.
Banks
are
not
in
business
to
modify
loans.
The
time,
energy
and
financial
commitment
currently
being
spent
on
loss
mitigation
should
be
focused
on
making
new
loans
and
collecting
outstanding
ones.
That
is
what
banks
do
best.
Lenders
will
benefit
from
more
certainty
in
the
market.
Most
Republicans
also
oppose
bankruptcy
relief
for
homeowners.
Suppose
the
market
for
residential
real
estate
comes
back.
Is
it
fair
for
consumers
to
reap
the
benefit
of
the
recovery,
leaving
lenders
out
in
the
cold?
Congress
could
limit
the
amount
of
the
write-down
of
the
principal
balance.
Or
it
could
require
that
the
property
have
lost
a
minimum
value
before
the
provision
would
apply.
Or
it
could
require
the
lender
to
share
in
any
appreciation
that
occurs
in
the
future
if
the
property
is
sold
or
transferred
at
death.
Very
conservative
members
of
the
financial
community
have
called
for
court
supervision.
Who
supports
court-supervised
modification?
Center
for
Responsible
Lending
Rainbow
PUSH
Coalition
Congressman
Barney
Frank
Senator
Whitehouse
Congressman
John
Conyers
Senator
Chuck
Schumer
President
Barack
Obama
Economist
Robert
Reich
Senator
Dick
Durbin
Why
hasn’t
bankruptcy
reform,
or
court-ordered
modification
passed?
Congress
has
not
passed
it.
What
can
I do
to
help?
Contact
your
Senators
and
member
of
Congress.
If mortgages could be restructured this way, the banks would take big hits. They'd be forced to cut the amounts owed by borrowers. They figure they do better by squeezing as much as they can out of distressed homeowners, then collecting as much as they can on foreclosed properties.
So, not surprisingly, the big banks have been mounting a major lobbying campaign to block legislation that would allow homeowners to use bankruptcy.
Bankruptcy has been part of the "free market system" for hundreds of years, but its details are determined through politics - the same politics that arranged the $700 billion bailout of Wall Street. In fact, you might say that during 2009, Wall Street went through its own kind of bankruptcy restructuring, with the generous aid of American taxpayers. JP Morgan Chase, Goldman Sachs, Morgan Stanley, Bank of America, Citigroup and Wells Fargo, along with their top executives, traders, and major investors, have benefited handsomely.
Similarly, as consumption collapses and the tsunami of foreclosures builds (potentially numbering in the millions), there is growing recognition that it would be helpful for lenders to write down mortgage interest and principal rather than permit a massive, disorderly and debilitating wave of home foreclosures.
Not only would mortgage write-downs help homeowners, a speedy process of writing down unsustainable mortgage debt would reduce bank losses and remove much of the uncertainty that continues to plague banks that hold a variety of financial claims whose values would become clearer once uncertainties about underlying mortgages were resolved.
March 30, 2009 “On the Urgency of Restructuring Bank and Mortgage Debt,
and of Abandoning Toxic Asset Purchases” John P. Hussman, Ph.D. wrote, “Allow bankruptcy judges to substitute a portion of foreclosed mortgage obligations with equivalent claims on subsequent property appreciation. “Push-down” of mortgage principal without offsetting compensation rights to lenders should be emphatically avoided.” http://www.hussmanfunds.com/wmc/wmc090330.htm
