San Jose Bankruptcy Attorneys and NACBA Propose Principal Paydown Plan for Chapter 13 to Help Struggling Homeowners

Principal Paydown Plan for Chapter 13 BankruptcyIn my San Jose bankruptcy practice, I meet with homeowners nearly everyday who are struggling to stay in their homes because of the foreclosure crisis. Many of them are in their 30s and 40s, and, as recently reported by NPR, disproportionately affected by steep declines in their home’s value because they had the unlucky misfortune of purchasing their first home during the housing bubble.  A bubble brought about by the big banks’ subprime mortgage lending frenzy (so they could repackage these toxic loans into mortgage backed securities and peddle these derivatives on Wall Street). This generation of first-time home owners, if they haven’t lost their home to foreclosure already, are struggling under mortgage debt that is often, here in the San Francisco Bay Area, twice the current value of their homes. They can’t take advantage of today’s low interest rates because they can’t refinance, and the big banks’ obstinate refusal to approve HAMP loan modifications on a large scale denies them relief from high, adjustable rate mortgages.

What can be done to help these homeowners keep their homes? Recall that in early 2009, when Democrats still held a majority in both houses of Congress, the House approved a bill that would have amended bankruptcy law, giving bankruptcy judges the authority in Chapter 13 cases to “cram down” mortgage loans to the current fair market value of the property. Such principal reduction already exists in Chapter 13 bankruptcy for qualifying auto loans. Extending this concept to home loans seemed like a no-brainer, and it would have likely helped hundreds of thousands of homeowners to stay their homes. Of course, the big banks have an army of lobbyists, and they prevented that bill from ever gaining traction in the Senate. Obviously, with the pro-big business ideology of the current Congress, the prospects for passing an amendment to bankruptcy law to allow for such principal reduction on mortgage loans are now even dimmer.

But there is new hope for an effective plan to combat the foreclosure crisis. Consistent with her tireless support of underwater, working homeowners U.S. Representative Zoe Lofgren, with the support of a several of my San Jose bankruptcy attorney colleagues and the National Association of Consumer Bankruptcy Attorneys (NACBA) has proposed a truly innovative solution to help underwater homeowners in Chapter 13 Bankruptcy.  The proposal is called the “Principal Paydown Plan,” and as proposed, it would not require amending bankruptcy law through congressional action. Instead, the Principal Paydown Plan would involve a mandate from the Federal Housing Finance Agency (FHFA), the appointed receiver of Fannie Mae and Freddie Mac. Under the Principal Paydown Plan, FHFA could mandate that while a homeowner is making payments in a Chapter 13 bankruptcy plan, all mortgage payments made by the debtor would be applied only to the principal balance of his or her mortgage loan, not to interest. Applying Chapter 13 bankruptcy debtors’ mortgage payments to principal only over five years would dramatically reduce the negative equity on an underwater property by the time he or she emerged from Chapter 13 bankruptcy. Even if you are not among those currently suffering under an underwater mortgage, I encourage you to please call Congresswoman Lofgren to thank her for her repeated efforts to help working people just like you.

I believe the Principal Paydown Plan would help tens of thousands of homeowners who are currently severely underwater in their home mortgages. Coupled with the ability to strip a second lien from a home in certain Chapter 13 bankruptcy cases, bankruptcy debt relief could dramatically reduce the amount negative equity among homeowners struggling to keep underwater homes. I urge you to show your support for the Principal Paydown Plan by contacting your representative and telling him or her that you want FHFA to implement the Principal Paydown Plan to allow Chapter 13 bankruptcy debtors to pay only on their mortgage’s principal while in bankruptcy.

If you are substantially underwater in your home mortgage and would like a free consultation with one of our San Jose bankruptcy attorneys, please call us at 408-286-2766.

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