NOW that the American people have chosen Senator Obama as the new president, possible amendments to the bankruptcy law may be ushered in as early as next year. During the debates, the Senator mentioned that his solution to the foreclosure problem would be to authorize bankruptcy judges to modify housing loans to make them more affordable. What he envisions is an amendment to the bankruptcy code empowering bankruptcy courts to modify mortgages in any way shape or form to make them more affordable to debtor thus allowing debtor to save his house. We anticipate that only residences would qualify for loan modifications in bankruptcy. Thus, investment properties or rentals would not qualify. Further, only residences purchased during a certain period of time might qualify. It would not be surprising to find out that housing loan modifications might apply both in chapter 13 and chapter 7 cases. This would be a wonderful amendment if loan modifications were allowed even in chapter 7 cases.
It might also be possible that the means test might be amended or junked altogether. The means test has to be amended if housing loan modifications are going to be allowed because as currently interpreted by the courts, mortgage payments cannot be deducted from monthly expenses in the means test, if debtor does not intend to keep the house, even if debtor still owns the house at the time the bankruptcy case is filed. Prior to the adoption of this interpretation by bankruptcy courts, debtors under the new bankruptcy law were allowed to deduct mortgage payments on houses that they were giving up. The ability to deduct mortgage payments is a major factor in qualifying debtor for a chapter 7 case. Many debtors were knocked out of a chapter 7 case and into a chapter 13 case, or face dismissal of their chapter 7 case for abuse, because mortgage payments on houses they were giving up were disallowed as deductions under the means test. Before the introduction of the means test, disposable income to qualify a debtor for chapter 7 depended on actual monthly expenses incurred. Thus under the old law, debtor could deduct mortgage payments for a house that he was giving up, as long is he was still legally liable for the mortgage payments on the day his bankruptcy case was filed. This was still the practice followed when the new bankruptcy law came out in 2005 with means testing because the new law’s threshold was that as long as debtor was legally obligated to pay the mortgage on the day of filing, he could still deduct the mortgage payment. Bankruptcy courts across the nation differed in their interpretation of this provision. Some courts said that, the plain language of the law allowed the deduction. Some courts said that, to allow the deduction, if the house was being given up, was an abuse of the law. Still, some courts said that, if creditor did not file motion for relief by a certain date, the deduction was allowed. The 9th circuit has adopted the interpretation of disallowing the deduction if debtor has no intention of keeping the house for California.At this time, homeowners can only rely on the ‘Home Rescue’ law, which took effect last month. However, this law is not effective in giving relief to homeowners. First, creditors can pick and choose which accounts they want to modify. Each creditor has it’s own set of criteria. Second, there is no major incentive for creditors to modify the loan except to compare losses from modification to losses from foreclosure. Third, creditors will not pick and choose an account with a second mortgage. Considering that most homeowners with mortgage problems have second mortgages (80/20) zero down, the ‘Home rescue" law means nothing to them.
If you need debt relief, contact my office. I will analyze your case personally.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
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