Los Angeles Bankruptcy Law Monitor : Los Angeles Bankruptcy Lawyer & Attorney : Christine Wilton Law Firm : Southern California Chapter 13 & Chapter 7 Bankruptcy, Foreclosure

We are all on the edge of our seats, watching the news about the Obama Home Affordable program and how so many trial loan modifications are failing in comparison to the number of applications for mortgage modifications.  We have also stood by and watched Congress shoot down the Mortgage Cramdown Legislation under SB61 that would have given bankruptcy judges the authority to modify mortgages in chapter 13 bankruptcy cases.  While all of this continues to take center stage in the news, there is a quiet storm brewing in the practice of chapter 13 bankruptcy that may modify some residential mortgages.

11 U.S.C. § 1322 (b) (2) is referred to as the 'anti-modification' statute and allows modification of secured loans; however, a bankruptcy court's power to modify loans does not extend to loans secured "only by a security interest in real property that is the debtor's personal residence."  What this means is that most homeowners are precluded from filing a chapter 13 case for the purpose of modifying their mortgages.  However, and here is where it gets flavorful because bankruptcy courts have distinguished some residential loans as not being protected under § 1322 (b) (2).

In re Scarborough, 461 F.3d 406 (3rd Cir. 2006) held that, "based on the plain language of 1322 (b), a creditor does not receive anti-modification protection for a claim secured by real property that includes both the debtor's principal residence and other rental property that is not the debtor's principal residence.  In re Bulson, 327 B.R. 830 (Bankr. W.D. Mich. 2005) allowed modification of a loan secured by an interest in property in which the debtor resided when the property involves multi-unit dwellings.  These two cases point to situations where the residential homeowners both lived in their homes and rented out a portion thereof, or otherwise lived in duplexes or other multi-unit properties.  This may be good news for some residential mortgage holders.

But here is the twist.  The lender must know, or have reason to know that the property was being used as both the principal residence and providing rental income at the time of the loan.  So, if you had a tenant on your property when you took out your loan and used that rental income in part, to qualify for that loan, then you may be able to modify your residential mortgage in a chapter 13 bankruptcy. 

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The mortgage meltdown and ensuing global financial crisis, in the fall of 2008, still reverberates today.  The New York Times reported on the essentials of the credit crisis and pointed out the breadth and depth origins of this crisis and likened these times to the Great Depression. 

I have previously reported on the financial crisis in The Economy of Bankruptcy ; while The National Association of Consumer Bankruptcy Attorneys [NACBA] has been following SB61 since its inception.  SB61 essentially will allow bankruptcy judges to modify the terms of a mortgage.  Recently, NACBA Director, John Rao testified on the matter in October, before the Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts.

As posted in the New York Times, House Passes Far Reaching Bill Tightening Financial Rules.  Unfortunately, the banking industry struck a win when the House voted to reject the proposed amendment, known as "mortgage cramdown," which is the measure that would allow bankruptcy judges to change the terms of mortgages for distressed homeowners.  This vote reversed the House's passage in March of a cramdown measure that subsequently died in the Senate.

American homeowners need a real solution and based on what I read over at The National Bankruptcy forum, our Bankruptcy Courts may not be equipped to handle the tsunami of bankruptcy cases that would result in the passage of such legislation.  To date, few mortgages are being permanently modified, as reported by the LA Times.  

My solution is for every American to obtain independent financial freedom by paying off their debts outside of bankruptcy, if possible. For those Americans struggling to pay their bills, consider either a chapter 7 or 13 bankruptcy and never look back.  The rules of bankruptcy do not require that you spend down all of your savings and lose your assets in order to file for bankruptcy protection.  The goal here is financial freedom and independence from the banking industry FOREVER.  The new paradigm as Dave Ramsey so eloquently puts it, DEBT IS DUMB AND CASH IS KING!

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In the Central District of California, year-to-date bankruptcy filings are up 70% over last year.  Chapter 7 filings make up 77% of the total filings year to date. Why? Because California’s unemployment rate is at an all time high and holding at 12.1% according to the Bureau of Labor Statistics.   EDD says we’re at 11.9%

Let’s just pour salt upon the open wound and admit that California was also the sub-prime loan mecca all the way into the crash in 2008. These option arm loans were sold here in California well into late 2007 and the "teaser" or introductory rates on these loans sold were 5, 7, and 10 year terms. This means that we have yet to see the end of the foreclosure crisis here in California because these loans have not yet adjusted upward.

With a surplus of uninhabited homes on their hands, banks are left holding the bag in the foreclosure game. Unfortunately, many homeowners could have saved their homes, had they contacted an attorney, who would have determined any legal claims to stop the foreclosure, like Truth in Lending Act (TILA), predatory lending (Fraud), or Real Estate Settlement Procedures Act (RESPA) violations.  However, this is not as easy as it sounds and requires litigation.  A  chapter 13 bankruptcy has been the forum of choice to stop foreclosures and save homes.  Unfortunately, SB 61, has not passed, but is still being discussed.  SB 61 would allow bankruptcy courts to modify mortgages and reduce principal loan balances in bankrutpcy.

We are all in this together and this market affects us all.  At no other time has it become more apparent that we join together for the solution.

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I just finished reading Battle on the Homefront  by Steven Seidenberg, in the latest issue of ABA Journal. With the rejection of Senate Bill 61 back in April, homeowners are left with trying to work out deals with the same parties that essentially helped create the foreclosure problems. Steven did a great job in outlining the current state of the foreclosure crisis and covers the problems in bankruptcy that homeowners are facing. I agree. We need to do more for homeowners in trouble and Bankruptcy Court can provide the neutral forum.

I’ve been watching the news and wrote my Senator to vote in favor of SB61 to no avail. I hear from clients, “If we could just write down some of our principal, we could afford the payments.” The federal government’s Home Affordable Plan doesn’t appear to be working and the lender’s aren’t moving fast enough to help homeowners in trouble.

In California, our problems are overwhelming because many of us have taken out jumbo loans during the housing boom and subsequently we have seen some of the nation’s greatest home price declines, creating substantial negative equity. The original Obama Plan excluded many California mortgages because the plan does not deal with mortgages that substantially exceed the value of the home. Recent changes to the plan have included homes with substantial negative equity, while the high value homes remain excluded from the program.

Ultimately, we need to show the lenders some value in the modification process. What this means, is that if modifying the mortgage will provide a lesser loss than the foreclosure, the lender is more likely to accept the modification proposal.
 

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