Bill Would Bring Relief for Homeowners

By Laura Cohn
Kiplinger's Personal Finance
Sunday, April 19, 2009

If you're considering filing for personal bankruptcy because you're having trouble making the mortgage payments on your primary residence, keep an eye on the so-called "cramdown" bill. The measure, which is part of President Obama's housing plan and is making its way through Congress, would allow bankruptcy judges in Chapter 13 proceedings to reset the terms of certain mortgages so that more homeowners can keep their homes.

The move would be a big change. At the moment, a Chapter 13 filing stops the foreclosure process and gives homeowners time to restructure their payments with their lender. But as the law currently stands, you don't have the ability to alter the terms of your loan.

Under the new measure, as passed by the House of Representatives, the judge can reduce your principal and interest rate. Say you have a $400,000 loan on a home whose value has fallen to $300,000. Under the plan, a bankruptcy judge could eliminate $100,000 of the debt, says Yardeni Research. Before you could qualify for a cramdown loan modification, you would have to show that you appealed to your mortgage lender for relief at least 15 days before you filed for bankruptcy.

While the plan would help more people keep their homes, the mortgage industry opposes it because of concerns it will destabilize the housing market and lead to more bankruptcy filings. Opponents worry that more homeowners in danger of foreclosure will file for bankruptcy if that's a surer route to keeping their homes.

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