Judicial Mortage Modification: The Bankers Just Don’t Get It!

I’m looking at the news reports coming out about the House-approved version of the bill giving debtors the opportunity to modify mortgages in Chapter 13 that happened only a few hours ago, and it feels like deja vu — all over again. It’s like “BAPCA (the 2005 bankruptcy reform bill) Redux.”

The attitude I’m feeling from the bank-inserted provisions indicates they think people go into bankruptcy willy-nilly, as if the process is a joy ride.

To whit, one of the major provisions: That debtors seeking modification in bankruptcy have to have attempted a modification previously outside of bankruptcy.

HELLO! PEOPLE DON’T WANT TO FILE BANKRUPTCY. In our bankruptcy law firm serving DC, VA and MD, we don’t see people lining up to file, if they could get a deal outside of bankruptcy, they will not actively seek out the possible stigma and a judicially-supervised financial life for 3 to 5 years in a Chapter 13 plan!

This is the same insanity that we saw in BAPCPA calling for credit counseling before filing bankruptcy. Again, no one in his or her right mind will file, if they could get an honest workout from lenders! Will the bankers ever get it?

The one ray of hope: The idea seems to be getting through to the media at least – since the power to modify in bankruptcy is limited to CURRENT mortgages, there is no way it could raise interest rates for new loans in the future. A lender cannot ask for a risk premium when making a new loan, since there is no risk it can be judicially modified! Arrrrrgh.

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