New Bill Introduced to Allow Mortgage Modification in Bankruptcy

Senator Durbin recently introduced S. 3690 that would allow modification of mortgages in Chapter 13 bankruptcy. The operative text of the legislation is as follows:

SEC. 103. HELPING FAMILIES SAVE THEIR HOMES IN BANKRUPTCY.
(a) Special Rules for Modification of Loans Secured by Residences.–
(1) IN GENERAL.–Section 1322(b) of title 11, United States Code, is amended–
(A) in paragraph (10), by striking “and” at the end;
(B) by redesignating paragraph (11) as paragraph (12); and
(C) by inserting after paragraph (10) the following:
“(11) notwithstanding paragraph (2) and otherwise applicable nonbankruptcy law–
“(A) modify an allowed secured claim secured by the debtor’s principal residence, as described in subparagraph (B), if, after deduction from the debtor’s current monthly income of the expenses permitted for debtors described in section 1325(b)(3) of this title (other than amounts contractually due to creditors holding such allowed secured claims and additional payments necessary to maintain possession of that residence), the debtor has insufficient remaining income to retain possession of the residence by curing a default and maintaining payments while the case is pending, as provided under paragraph (5); and
“(B) provide for payment of such claim–
“(i) in an amount equal to the amount of the allowed secured claim;
“(ii) for a period that is not longer than 40 years; and
“(iii) at a rate of interest accruing after such date calculated at a fixed annual percentage rate, in an amount equal to the most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk; and”.

As I have opined before (and here and here), there are many reasons why allowing mortgage modification in Chapter 13 makes a great deal of sense. Here are a couple more reasons:

1. Almost all of the mortgages in this country are held in trusts. Each of these trusts has a whole panoply of parties responsible for various aspects of the mortgage, many of which have conflicting interests. Often, the various parties to the trust don’t want to act for fear of being sued or don’t want to act in a way that is in the interest of the investors because that is against that parties’ interest.
2. These trusts are known as REMIC trusts and are given special tax treatment. That tax treatment can be threatened if too many of the mortgages are modified.

By allowing mortgages to be modified in Chapter 13, both of these sticky conflicts are avoided and the Bankruptcy Code can accomplish what it was intended to do: give the debtor a fresh start and treat all creditors fairly.

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