A change in the law to permit home owners to FORCE a modification on mortgage lenders in Chapter 13 bankruptcy has begun its journey in Congress. Last week a committee in the House of Representatives voted the bill out and moved it to the full body for consideration.
HR 200 would substantially expand the powers of a debtor in Chapter 13 and give him or her the ability to do something that, up until now, has been sorely needed, but unavailable: Modify the terms of a mortgage secured by a primary residence over the objection of the lender. Presently this has been barred by a clause in the law (Section 1322(b)(2) of the federal Bankruptcy Code, for the legally-inclined), which was written into the law by lenders years ago. Given the current crisis, legislators see the necessity of removing it, in its current form.
With the change in the law — which is backed by President Obama and the Democratic majority — a home owner, in Chapter 13 could: 1) Reduce the interest rate on his or her loan to approximately the prevailing rate plus one, 2) Change the loan from a negative amortization or interest-only loan to one with positive amortization, 3) Possibly extend the term to as much as 40 years, and — most importantly — 4) Reduce the principal balance TO THE CURRENT VALUE OF THE HOME.