Bankruptcy Fables Your Lenders Love
Should bankruptcy judges have the right to modify home mortgages? Would that be fair? Or unfair?
It’s a political question, of course, and when the time came for the Senate to vote in April the count was 51-to-45 against a measure would give judges the right to change home loan terms and rates. For the moment at least, S.61, the Helping Families Save Their Homes in Bankruptcy Act of 2009, is dead.
Or is it?
In reality the Senate vote was just one battle in a war which is going to last for many months. As Sen. Richard Durbin (D-IL), the bill’s sponsor, told The Washington Post that “I’ll be back. I’m not going to quit on this.”
But opponents, according to Forbes magazine, “argued that allowing judges to unilaterally adjust the terms of mortgages (or “cram down” the mortgages, as the financial services industry says) would create an alarming precedent, undermining existing principles of contract law. Eventually, they said, lenders would have to raise mortgage rates for everyone to cover losses forced on them by bankruptcy judges.”
Really? An alarming precedent? Undermine contract law?
This is nonsense.
The truth is that until the Supreme Court’s Nobleman case of 1993, bankruptcy courts routinely changed rates and terms for home mortgages. Contract law was not undone, there were no alarms and the country did not implode into a lawless mass.
With Nobleman, however, the Supreme Court said that bankruptcy judges could not change the terms of first liens on a residential property. They could, however, change the terms on first liens secured by vacation homes, yachts and private planes.
In other words, there is NO centuries-long precedent which says we can’t go back to what we were doing in 1993 except that the banks and credit card companies would be offended. There’s no reason why the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 cannot be undone — this was legislation which says that before a homeowner can file for bankruptcy he or she must first have six-months of financial counseling. In other words, by the time the borrower meets the counseling standard the home has already been foreclosed.
Do you think the Republican House, the Republican Senate and the Republican President who passed this bill in 2005 did not know this? Do you think they did not know that they were making student loans life-long debts that were virtually impossible to relieve through bankruptcy? Or making credit card debt virtually impossible to modify?
Don’t be fooled. Fixing the bankruptcy system does not involve breaking any sort of precedent. There’s no cause for alarm. There’s merely a need to get fairness and balance back into the legal system.
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