Joint Memo for Proposed Bankruptcy Law Reform:
Solutions to Preserve Homeownership
April 27, 2007
John Rao, National Consumer Law Center
Henry J. Sommer, National Association of Consumer Bankruptcy Attorneys
Travis Plunkett, Consumer Federation of America
Ira Rheingold, National Association of Consumer Advocates
Ellen Harnick and Eric Stein, Center for Responsible Lending
The Center for Responsible Lending conducted a study of over six million
subprime home mortgage loans, and projected that 2.2 million Americans with loans
originated between 1998 and 2006 have lost or will lose their homes to foreclosure.
calculation is conservative: It assumes that approximately 20% of subprime mortgage
loans originated in 2006 will end in the loss of the home to foreclosure;
a recent Lehman
Brothers study put the number at 30%.
The largest proportion of these losses have yet to
Without intervention, a staggering loss of homeownership is inevitable.
To help avert a foreclosure crisis, we propose an amendment to the Bankruptcy
Code to empower bankruptcy courts to modify home mortgage loans as they can virtually
every other kind of secured and unsecured debt. Our proposal does not seek to revisit the
2005 amendments to the Code. Rather, it seeks to remedy an anomaly created by a
provision in the 1978 Bankruptcy Code, which singles out home mortgage lenders for
special protection and makes the home mortgage on the primary residence virtually the
only debt the court cannot modify and the home the only asset it cannot protect. The
1978 provision also denies low wealth and middle income consumers protections
available to family farmers, corporations, and consumers wealthy enough to own two
Our proposal would remedy this anomaly in Chapter 13 and provide a comparable
solution in Chapter 7 by, generally, permitting bankruptcy courts to write down the debt
to the market value of the home and restructure the mortgage.