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Putting the Bankruptcy Option Back on the Table for Distressed Homeowners

posted by Bob Lawless
The New York Times editorialized that "it is time to revive the fight to open the courthouse door to bankrupt homeowners." Specifically, the NYT wants to revive the proposal to let homeowners use the bankruptcy process to write down the principal balance on their mortgages to the value of the home. Yes, exactly right, as discussed many times here, here, here, here, here, here, here, and here on Credit Slips.


I had a feeling it was coming to that again. Elizabeth Warren has been everywhere lately! Saw her on the Maddow Show, ABC. etc.... She never quite reached the question of the Bankruptcy option though but that something needed to be done. She drove home that helping homeowners was the whole purpose of TARP which she oversees and how bailed out Cos seem to have forgotten that. Guess that's why we haven't seen her here lately.

And in a story that has gotten almost no notice - Bank of American came out in support of cram down.

However, there are only two stories mentions of it that I can find -



Not exactly the New York Times, Washington Post and the Wall Street Journal - all of which apparently don't regard a reversal of position of one of the four largest banks to be news worthy.

Reading what Barney Frank said in the Huffington Post article, he apparently doesn't have any clue as to how to neutralize the opposition from the smaller, main street banks and credit unions, like by, say, writing them out of the legislation.

For example - make mortgage modification applicable only to mortgages that were securitized. Or give credit unions a blanket exemption - they didn't cause the problem, and lord knows there is precedent for special treatment of credit unions in the Bankruptcy Code. Do the same thing with small banks - define them by size, for example, and exclude 'small banks' as defined in Section 101 of the Code from cramdown.

And Barney - if you're reading this - why is it so hard pull the teeth of the opposition by just putting some limits in the relief available? Like some of the same limits that are in existing programs that don't work because they are voluntary? For example, principal reduction not to the fair market value of the real estate, but to 115% of the FMV.

The lack of imagination on how to overcome some of the political hurdles to this kind of legislation is mind boggling. They run into some opposition and just give up instead of repackaging the legislation.

Of course Republicans won't play ball. They are still crying over health care. Still crying that they lost the presidential election.... We have them openly defending Wall Street now after blasting them all winter! HYPOCRITES! Maybe investors need to file suit against Servicers for not Modifying loans and keeping them in the black and not stabilizing their investments. Now that we know more about Goldman Sacs and the ABACUS 2007-AC1 CDO you would think someone would want to salvage whats left. I mean there are real people attached to that CDO not just hedge funds and IRA fund managers, it may be your next door neighbor.

This move by NYT is an anticipated one. Homeowners sometimes needs some indirect assistance.
Thanks for sharing

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.