Consumer and civil rights advocates are fighting for legislation to pass in Congress designed to help foreclosure victims save their homes and avoid eviction with the help of the bankruptcy courts. This bill making changes to existing bankruptcy laws and the power of judges is supported by many consumer advocacy groups, such as the Center for American Progress, the American Association of Retired Persons (AARP), the National Association for the Advancement of Colored People (NAACP), and the Service Employees International Union, just to name a few.
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The new legislation would allow bankruptcy courts to reduce the debt owed on a homeowner's primary mortgage. This could help balance the 8% decline in the property values in the housing market in the last year. After being turned down by the Senate, controlled and funded by the banking industry and mortgage company interests, these hopeful groups have petitioned the House and are very optimistic of a successful outcome for the proposed legislation.
Currently, a Chapter 13 bankruptcy can be used to stop or delay the foreclosure process, but the courts have never had the ability to eliminate any portion of the debt owed on a first mortgage. A Chapter 13 bankruptcy helps the victim to establish a legal payment plan under the supervision of the courts, where a Chapter 7 eliminates unsecured debt altogether through discharge. As the law stands now, though, a Chapter 7 bankruptcy can not eliminate the debt of a mortgage or other secured credit.
Parties against the new legislation (banks, mortgage companies, and their politically-connected representatives) claim these changes would only raise mortgage rates for everyone across the country and are lobbying against the changes with the slogan "Now is NOT the time to change the bankruptcy law and make things worse for consumers". Many consumers are feeling the pain of lower home values and higher interest rates and with 20,000 new foreclosure filings every week, many people facing the loss of their homes in coming months would welcome this type of change.
As the housing market continues to worsen, foreclosures will grow and more and more families will need help, either from their lenders, bankruptcy attorneys and courts, and other third part companies. But two of the questions surrounding this proposed change to the bankruptcy law are should the government be obligated to provide foreclosure help and is doing it through the bankruptcy courts the right choice? While the debate is far from over, it seems that a change of this nature would be more welcome to the American people than indiscriminate monetary bailouts made by the Federal Reserve or Congress to the banking system.
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