Friday, August 29, 2008

Negative Equity in Vehicle Loans under Chapter 13: Harmonizing New 9th Circuit BAP Opinion With Recent Oregon Bankruptcy Court Opinions

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

In re Penrod

9th Circuit BAP (arising out of Northern District of California)

BAP Nos. NC-07-1360-MkKJu & NC-07-1368-MkKJu

July 28, 2008

Consider how many Chapter 13 cases involve vehicle loans, how many of those loans are undersecured, and of these how many are undersecured because they include negative equity from a prior vehicle trade-in. BAPCPA created confusion about how to treat such negative equity in vehicle loans 910 days old or less with its notorious "Hanging Paragraph" of Section 1325(a). . In just the last few months the Oregon bankruptcy bar has been "blessed" with three separate opinions interpreting, to use Judge Randall Dunn's apt language, "the semantic briarpatch generally referred to as the Hanging Paragraph."

All three opinions--one last December by Judge Dunn, In re Johnson, and another in February by Judge Albert Radcliffe, In re Riach (unpublished letter opinion so link not readily available), both of the bankruptcy court for the District of Oregon, and the third just a few weeks old from the 9th Circuit BAP (Northern District of California), In re Penrod--deal with the same issue: "whether a creditor holds a purchase money security interest (“PMSI”) for purposes of the Hanging Paragraph, where a portion of its debt represents financing of negative equity in a vehicle traded in by the debtors at the time the debtors purchased their new car" (quoting Judge Dunn's opinion again). Luckily for practitioners, these three opinions all arrived at virtually the same conclusion, on largely (but not totally) the same rationales, with two differences worth noting, one in rationale and the other in practical effect.

First, the uniform conclusion was 1) that the negative equity which derived from the payoff of the traded-in balance was not part of the PMSI and so was NOT subject to the Hanging Paragraph's protection against cramdown; but 2) that, under the "dual status rule," this mixing of PMSI and non-PMSI status in one vehicle loan did not "transform the entire loan into a non-PMSI one but rather allowed the PMSI portion to be protected under the Hanging Paragraph while the non-PMSI one was not.

Second, as to the differences in rationale, the two Oregon opinions referred very specifically to the Oregon version of the UCC, with Judge Dunn expressly rejecting another bankruptcy court's suggestion that a uniform federal definition of PMSI be developed, instead stating: "I can appreciate the irony in developing federal common law to interpret a state law code term to aid in the interpretation of a federal law code provision. However, I find it inappropriate to do so. I join
with most other courts that have considered the issue and look to state law to determine whether [the vehicle creditor] holds a PMSI." The BAP opinion in contrast makes a point of NOT looking to the California version of the UCC in defining PMSI, instead looking to the current version of the general UCC as "a unifying code governing commercial transactions across and among the states that have adopted it." So the BAP extensively quotes from and refers only to the
UCC as promulgated by the National Conference of Commissioners on Uniform State Laws and its Official Comments (except for a passing mention of the California UCC on the limited issue of its interplay with California vehicle financing laws and disclosures). However, this difference in approach still yields the same result, probably because both the Oregon and California UCC's follow the uniform version closely as to the sections pertinent to this analysis.

A practical difference among these three cases was whether they addressed how to allocate debtors' prepetition payments between the PMSI and non-PMSI components of the debt. Without guidance on this, attorneys would be left up in the air about the exact amount that must be paid in a Chapter 13 plan. Judge Dunn chose not to reach that issue in In re Johnson, simply denying confirmation of a Plan that proposed to cram down the entire vehicle debt, with a 28-day order to file a modified plan. Judge Radcliffe, who in In re Riach quoted and followed In re Johnson closely in rationale and result, also denied confirmation with leave to amend, but he stated clearly (making the calculations down to the penny!) how to allocate those prepetition payments. According to debtor's counsel, Karen Oakes of Klamath Falls, Oregon, his opinion resolved this practical question because she briefed the issue and asked for a ruling. His answer: if, as here, there is no contractual provision allocating payments, prorate the combined amount of prepetition payments between the PMSI and non-PMSI components based on the ratio between the amount financed just for the new purchase and the amount used for the trade-in negative equity. Here, the contract did provide that payments on the account would go first to interest and late charges, and then to principal, so the amount to allocate was the amount credited to principal, $2,120. The ratio between the portion financed on the new purchase, $19,471, and the amount used to pay off the trade-in's loan, $3,768, is 83.79% to 16.21%; and multiplying the current balance on the account of $20,709 by the PMSI side of that ratio, 83.79%, equals $17,351, which is the PMSI component of that balance, the amount protected by the Hanging Paragraph. Since the vehicle was worth somewhat less than that, the remaining amount of the balance would be treated as a general unsecured claim. (Had the vehicle been worth more than $17,351 , the plan would have to provide for payment of that amount: "collateral's value is a floor below which the secured claim cannot be decreased".)

As for the BAP Penrod opinion, it did not need to address the payment allocation issue because the creditor surprisingly did not raise the issue on appeal, even though the bankruptcy court had allocated ALL of the prepetition payments to the PMSI side of the debt, thereby reducing the amount protected by the Hanging Paragraph.. But note that according to the Clerk of the BAP, Harold Marenus, about 2 weeks ago the creditor in this case filed a notice of appeal to the 9th Circuit (Appeal # 08-60037). As of this writing there has been no motion filed with either the BAP or the 9th Circuit to stay the BAP's ruling pending appeal. So this BAP opinion appears for the moment to be good law, further buttressing the two Oregon opinions which preceded it. BUT IF this BAP opinion IS overturned by the 9th Circuit, such a decision would also effectively overturn the Oregon opinions. According to Mr. Marenus, the 9th Circuit will likely take about two years to rule on the Penrod appeal.

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

© 2008 Bankruptcy Litigation Support for Attorneys

Thursday, August 28, 2008

Prospects for Amendments to BAPCPA Under an Obama-Biden Administration

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys:

Bankruptcy legislation is not usually fodder for Presidential campaigns. But this has been in so many respects an unusual campaign, and so proposed amendments to bankruptcy law have made it to the campaign trail.

On one hand, in his website John McCain refers to his vote at the time of BAPCPA in support of military personnel, but nowhere in this website does he propose any future bankruptcy legislation. In contrast in Barack Obama's website one of his 10 key bullet-points on the Economy is "Reform Bankruptcy Laws." He proposes amending bankruptcy law to allow modifications of mortgages, and to create some kind of streamlined medical bankruptcy.

More dramatically, a few weeks ago Obama gave an entire speech (even if it was only 15-mintutes long) focusing primarily on bankruptcy reform proposals, one to "fast-track" bankruptcies for military families and disaster victims by exempting them from the means test and from credit counseling, another to provide seniors a larger federal homestead exemption.

But that was a few weeks ago. Now Obama has chosen as his vice-presidential nominee the person who was probably the most ardent and public Democratic supporter of BAPCPA. Not only did Joe Biden vote for BAPCPA while Obama voted against it, they voted on the opposite side of virtually every one of the numerous amendments voted on before the final bill was passed. AND Biden's votes on virtually all these amendments matched John McCain's.votes. This leaves us with the rather unusual situation that the two major political differences of the last 5 years between these presidential and vice-presidential nominees are BAPCPA and the Iraq war (which Biden originally supported and then became one of its most vigorous opponents).

Some bankruptcy observers are saying that Biden's ascension to the ticket makes BANCAP amendment less likely, regardless what's on Obama's website or in his populist speeches. They point to the fact that MBNA and its employees have as a group been Biden's largest campaign contributors over the years, and that one of his sons has worked as a consultant for MBNA. (See this bankruptcy attorney's blog and an Associated Press story of 8/26/08.)

Perhaps a more realistic view turns on broader economic and political developments in the next few months. IF Obama-Biden win in November, and especially IF there are some Democratic gains, as is generally expected, in both the House and the Senate, there will be tremendous political pressure on the Democrats to address the foreclosure and other economic problems. The new Housing and Economic Recovery Act's $300 billion voluntary program to refinance troubled mortgages begins being implemented on October 1, 2008, with much speculation about whether it will indeed help 400,000 households as was projected. If this program, and the other components of the Act, are successful, together with all the other forces on the real estate and financial sectors, at significantly improving the foreclosure and general economic situation, there may be less pressure to act. Given that this is just a few months from now, a greatly improved outlook seems doubtful. More likely BANCAP reform of some sort would be part of their "first 100 days" plan.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

© 2008 Bankruptcy Litigation Support for Attorneys

Wednesday, August 27, 2008

9th Circ BAP Holds $77,088 of Costs of Prosecution Dischargeable in Ch 13 Since is Not a "Criminal Fine": Judge Dunn Writes BAP Opinion Over a Dissent

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

6/08/08; In re Joseph Elliot Ryan, BAP Case No ID-07-1316-DMkMo

This recent 9th Circuit BAP opinion, written for the court by Judge Randall Dunn in his capacity as a BAP judge, fills an important gap in the nexus between bankruptcy and criminal law in the 9th Circuit. Besides reminding attorneys to be very mindful of the distinctions among the various components of a criminal judgment, this opinion states clearly that criminal prosecution costs ARE dischargeable in Chapter 13 cases.

The legal issue here is a simple definitional one: does the phrase "criminal fine" in § 1328(a)(3) of the Bankruptcy Code include the costs of prosecution awarded against a debtor in a criminal judgment? This subsection of the Code excludes from a Chapter 13 discharge "any debt . . . (3) for restitution, or a criminal fine, included in a sentence on the debtor's conviction of a crime." The underlying bankruptcy court for the District of Idaho held that such costs of prosecution fell within the definition of a criminal fine, and so were exempt from discharge. In a split 2-1 decision the BAP reversed the bankruptcy court and discharged the debt.

Debtor had been convicted in federal court of possession of an unregistered firearm, served his time in prison, paid a fine of $7,500, his restitution of $750,000 was eliminated by the trial court, leaving him to pay $83,420 in costs of prosecution. He filed a Chapter 7 case and received a discharge, then filed a Chapter 13 case listing the costs of prosecution as his sole debt, filed an adversary proceeding to determine the dischargeability of that debt, which was dismissed by the bankruptcy court as being premature,. So he completed payments under the plan--of which $2,775 was paid on the costs of prosecution claim, with a balance remaining of $77,088--and received a discharge order. He then renewed his adversary proceeding to determine dischargeability of the remaining balance on the costs of prosecution claim, which the bankruptcy court ruled was not dischargeable because it was a "criminal fine" under Section 1328(a)(3).

"Criminal fine" is not defined anywhere in the Code, so its meaning is ambiguous and the courts must look to the statutory context and legislative history to determine legislative intent.

The statutory context is viewed through two basic countervailing policy goals: on the one hand providing a fresh start to overburdened debtors requires exceptions to discharge to be interpreted strictly in favor of debtors, especially in Chapter 13 cases; on the other hand historical deference to criminal courts requires excluding criminal sanctions from bankruptcy discharge. Judge Dunn then analyzed how these two policies have been applied by the Supreme Court in two seminal cases dealing with the interplay between bankruptcy and criminal law, Kelly v. Robinson, 479 U.S. 36 (1986) and Pa. Dept. of Pub. Welfare v. Davenport, 495 U.S. 552 (1990). His 7-page history of these decisions and their progeny is a valuable discourse in these policy tensions, particularly between the Supreme Court and Congress. Kelly held that criminal restitution obligations
were exempt from discharge in Chapter 7 cases since such obligations are "not compensation for actual pecuniary loss" as stated under Section 523(a)(7); in contrast Davenport held that criminal restitution obligations were NOT exempt from discharge in Chapter 13 cases since they are a "debt" under Section 1328(a).

Congressional reaction to the Davenport decision sets up Judge Dunn's well-reasoned legislative history analysis. Within months of Davenport, Congress amended Section 1328(a) to add an exception from discharge for criminal restitution, and a few years later in 1994 inserted the "criminal fine" language to Section 1328(a)(3). The legislative history behind the first amendment makes very clear that its express intent is to overrule Davenport, specifically referring to criminal restitution obligations. In contrast, the legislative history behind the second amendment, adding the "criminal fine" language. does not help define that term. Judge Dunn's primary statutory interpretation argument is that Congress could easily have explicitly added costs of prosecution to the exemption from discharge at either of these opportunities and did not do so. To buttress this he also notes that in the time between the 1986 Kelly opinion and the 2000 and 2004 amendments, a number of bankruptcy courts and circuit courts of appeal had determined that costs of prosecution were not dischargeable under Chapter 7, and these cases "presumably were known to Congress" and yet still it did not include costs of prosecution in these amendments to Chapter 13 discharge. Nor did it adopt the broader exception language of Section 523(a)(7) into Chapter 13 discharge exceptions. By way of contrast, BAPCPA's constriction of the Chapter 13 superdischarge was largely accomplished by Congress incorporating exceptions to discharge straight from Section 523(a); Congress certainly knows how to do that if it wants to.

Finally, on the rationale that "[d]efinitions or interpretations of terms under other relevant federal statutes are useful to inform our interpretation of such terms, used but not defined in the Bankruptcy Code," Judge Dunn's BAP opinion examined federal statutory and case law in determining that costs of prosecution are not covered by the term "criminal fines" in federal criminal law.

The dissent dismisses Judge Dunn's "great deal of time and analysis" to arrive at a narrow reading of "criminal fines", and instead asserts that one need only to look at federal criminal opinions to see that costs of prosecution are treated as criminal fines. The source of this disagreement between the majority and the dissent is the interpretation of a couple 9th Circuit opinions from the 1970's and 1980's and whether, as the dissent asserts, these opinions treated costs of prosecution as criminal fines for purposes of sentencing. As the dissent concludes, "reasonable minds may differ," but its argument is not helped by its overly general assertion that "treating reimbursement costs as criminal fines within Section 1328(a)(3) is a more natural reading of that section" and more in keeping with "the history behind the1994 amendment that added "criminal fine" to Section 1328(a)(3)," but says this without citing anything in that history supporting that assertion.

BOTTOM LINE: SO... criminal fines, restitution AND prosecution costs are NOT dischargeable under Chapter 7, whereas in Chapter 13 criminal fines and restitution are also NOT dischargeable but prosecution costs ARE.

Note: pre-BAPCPA law applies to this case because the Chapter 13 case was filed before BAPCPA's enactment, but be aware that its enactment did not change Section 1328(a)(3), thus presumably making this case still good law after BAPCPA.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

© 2008 Bankruptcy Litigation Support for Attorneys

Tuesday, August 26, 2008

Foreclosures: The Oregon Face of the National Story

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys:

The national news has for a long time been full of stories about huge increases in the national mortgage default and foreclosure rates, and about particular areas of the country that have been hardest hit, such as California, Nevada, Florida, Michigan and Ohio.

But what is the Oregon side of this story? The standard mantra has been that because most of Oregon did not experience the real estate boom nearly as intensely as did so much of the rest of the country, Oregon in general has thus far avoided the worst of the real estate bubble burst. But are there indications that just as the increases in property values started later in Oregon and continued somewhat longer than in other parts of the country, it is just taking longer for the foreclosure wave to hit us?

An Associated Press story on 8/25/08 pointed to a potential danger signal. Although home sales in July 2008 in a 13-state Western region increased slightly compared to July of last year, Portland was among the top 10 metro areas in the nation with the largest drop in home sales. This reduction in sales may well be related to the relatively strong sales that had been still occurring in Oregon compared to the rest of the country back in the comparison month of July 2007, as well as to perhaps some present flowing of real estate activity away from Oregon and to the relative bargains of the foreclosure capitals of Las Vegas and Stockton. But if this reduction in sales continues in the coming months, it may signal that more of the foreclosure tide is more firmly settling into this state.

Showing that this not just a Portland metropolitan abberation, the National Association of Realtors’ second-quarter 2008 home sales data shows that Oregon was 3rd worst in the country (after Washington and Idaho) in reduced sales percentage, at negative 33.5%. Here is the link to a table from the Realtors' group showing this data on a state-by-state comparison:

As to more direct foreclosure information, a company called tracks what it calls pre-foreclosure filings, "the first initial notice," presumably recorded notices of default (although it does make its methodology readily available). It reported that in July 2008 Oregon was one of 14 states with a record number of such pre-notice filings for the month, 3,199 of them. For more about this see:

Some addional information to consider as we keep a close eye on upcoming developments:
1) Nationally the delinquency rates and foreclosures have climbed most steeply on subprime mortgages, and in Oregon the percentage of subprime mortgages is lower than for the US as a whole: 9.7% instead of 13.3% of total mortgage loan dollars. And within these subprime mortgages, Oregon also has less loan dollars in the particularly dangerous adjustable rate mortgages: 6.1% instead of 8.8%. (Sources: Freddie Mac and First American CoreLogic, as of 4/08).
2) Homeownership rates are somewhat lower in Oregon: 64.8% compared to 67.3% national average. (Source: US Census Bureau, 2006.)
3) The unemployment rate is currently a little higher in Oregon than the US average: 5.5% compared to 5.3%, as of July 2008. (Source: Bureau of Labor Statistics.)
4) In the calendar year 2007, the foreclosure rate—the portion of households receiving any kind of foreclosure-related notice + REO’s—of the US in general was 1.033%, which was an increase of 79.2% from the 2006 rate; whereas the foreclosure rate in the Portland/Vancouver/Beaverton metropolitan area was only 0.602%, which was a much smaller increase of 24.2% from 2006’s rate (
5) For the calendar month of July 2008, the foreclosure rate of the US increased by 8% over the prior month, by 55% over July 2007; for Oregon it decreased by 4% over the prior month, but increased 192% over July 2007. The counties with the worst foreclosure rates: Deschutes, Clackamas, Multnomah, Yamhill, Jackson (

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys:

© 2008 Bankruptcy Litigation Support for Attorneys

Monday, August 25, 2008

New 9th Circuit BAP Opinion Weighs in Where Oregon Court Have Recently Been: BAPCPA's "hanging paragraph" & Trade-in Negative Equity in Vehicle Loans

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys:

Please read this Bulletin together with the one dated 8/29/08 entitled: Negative Equity in Vehicle Loans under Chapter 13: Harmonizing New 9th Circuit BAP Opinion With Recent Oregon Bankruptcy Court Opinions

June 28, 2008
In re Penrod
9th Circuit BAP, BAP Nos. NC-07-1360-MkKJu & NC-07-1368-MkKJu

So many bankruptcy debtors' vehicle loans are undersecured, and so often they are undersecured at least in part from the lenders having paid off prior undersecured loans on traded-in vehicles as part of the financing package. Therefore, how the trade-in portion of vehicle loans are treated affects many Chapter 13 cases, and because there are often many thousands of dollars at stake, whether that amount is treated as a secured or unsecured claim under BAPCPA will often greatly effect the monthly Plan payment amount as well as the total amount to be paid into the Plan. So the feasibility and eventual success of many cases turns on this issue.

In a published opinion dated 7/28/08 but released for publication only last week, In re Marlene Penrod, the 9th Circuit Bankruptcy Appellate Panel held that under BAPCPA that portion of a 910-day or less vehicle loan which was used to pay off a prior trade-in loan is secured by a Purchase Money Security Interest, and so must be subtracted from the loan balance to determine the amount of the secured claim. In that case the total loan balance was $25,675, the amount paid by the lender to pay off the undersecured loan on the traded-in vehicle was $7,137, and the value of the vehicle at the time of the Chapter 13 case was $15,615. The creditor argued that under amended Section 1325(a) its entire balance of $25,675 should be protected under that section and paid in full in the Chapter 13 plan. (The amended Section 1325(a) contains the infamous "hanging paragraph," so-called because Congress did not make clear in BAPCPA where in the Code it belonged!) Debtor argued that the paid secured claim should be limited to the value of the vehicle, $15,615, in that the hanging paragraph's creditor protections did not apply to this debt. After detailing its argument in a lengthy opinion, the BAP upheld the ruling of the underlying bankruptcy court in subtracting from the $25,675 balance the $7,137 which had been used to pay off the trade-in's loan, to arrive at a secured claim of $18,538.

The BAP noted that no Circuit Courts of Appeal or Bankruptcy Appellate Panels had addressed this issue. (And it did not refer to any specific bankruptcy court decisions on point, including two recent Oregon opinions--please see my 8/29/08 Bulletin on those.) So it made a very detailed analysis of Purchase Money Security Interests (PMSI) under the California version of the Uniform Commercial Code (UCC), determining that 1) the negative equity from the payoff of the trade-in loan was not part of the "price" of the purchase of the vehicle under Section 9-103(a)(2) of the UCC, and 2) negative equity was not part of the "value given to enable the debtor to acquire rights in" the car. Thus negative equity is not part of the PMSI.

This left the question of the effect of the Bankruptcy Code's new Section 1325(a) on the creditor's claim if a part of it was PMSI and part was not. The BAP discussed two possibilities: 1) the "transformation rule," positing that when a transaction contains both purchase money and non-purchase money obligations, the whole transaction is "transformed" into a non-purchase money one; and 2) the "dual status rule," positing instead that part of the transaction be treated as secured by a PMSI while the other part is not . Under the "transformation rule," the creditor would lose the entire benefit of the new Section 1325(a), that is, the entire claim would be subject to cramdown, as the debtor argued, whereas under the "dual status rule," the PSMI portion would not be subject to cramdown whereas the non-PMSI portion would. The BAP chose the latter rule because it "essentially captures both the lender's reasonable expectations and the debtor's economic situation, and is consistent with the apparent purpose of the hanging paragraph [Section 1325(a)]."


The portion of the vehicle loan used to pay off the prior traded-in vehicle loan is not PMSI according to the California UCC. But the entire claim is then bifurcated into a PMSI secured portion and the non-PMSI secured portion; the PMSI portion (the total claim minus the non-PMSI amount used to pay off the trade-in loan) is the amount which is protected by the amended Section 1325(a) and must be paid by the debtor.

IF this opinion stands, its impact may be significant, although the Oregon Bankruptcy Court has already ruled twice on this same issue, in December 2007 and February 2008, reaching the same conclusions on the basic issues of the PMSI and the "dual status rule," but with a couple of potentially important difference. Please refer to my Bulletin of 8/29/08 about this.

Furthermore, according to the Clerk of the BAP, Harold Marenus, the creditor in this case has filed a notice of appeal to the 9th Circuit (Appeal # 08-60037). As of this writing there has been no motion filed with either the BAP or the 9th Circuit to stay the BAP's ruling pending appeal, So the opinion appears for the moment to be good law. The practical question is whether this makes any difference in Oregon in light of the two local opinions. (Again, see my 8/29/08 Bulletin.) IF this BAP opinion IS overturned by the 9th Circuit, such a decision would also effectively overturn the Oregon opinions . . . so stay tuned.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

© 2008 Bankruptcy Litigation Support for Attorneys

Friday, August 22, 2008

The Impact of the Major New Federal Housing Law on Your Bankruptcy Practice

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

One of the biggest stories from Congress late last month was its passage, and President Bush’s signing (contrary to his earlier veto threats), of the Housing and Economic Recovery Act of 2008. The Act includes no changes to the Bankruptcy Code, in case you haven’t already assured yourself of this.

But this Act still has potentially significant, albeit speculative, consequences for the bankruptcy and debtor/creditor world. Putting aside the likely only tangentially relevant potential tax credits for limited first-time home buyers, the major shoring up and regulation of Fannie Mae & Freddie Mac, and a variety of other sections of the 600+ page Act, the most directly relevant is the $300 billion expansion of the FHA’s authority to refinance troubled mortgages. This program is completely voluntary for lenders, but Congress estimates that about 400,000 homeowners will be helped through this program, which starts October 1, 2008. Given the millions of distressed properties in California and the Southwest, in Florida, and in the "Rust-belt," one wonders how relatively few will be helped here in Oregon and the Northwest.

The practical question for attorneys with clients facing foreclosure is who qualifies for this program. To advise homeowners of their options appropriately, an attorney needs to determine if this new tool is worth pursuing. If a homeowner clearly does not qualify, then the attorney can rest assured that this option has been sufficiently investigated.

Only owner-occupants are served by this new program, and only those who can establish (through IRS records and a mortgage debt-to-income ratio of greater than 31% as of March 1, 2008) that they are unable to afford their mortgage payments. The new loans will be for the lesser of 1) 90% of the home value and 2) the debtors’ ability to repay the new 30-year fixed-rate loans, based on current FHA affordability standards.

But likely the one simple factor that will disqualify a large portion of the homeowners who seek legal advice is that no subordinate liens can exist on the property. So any such subordinate liens must release their liens either voluntarily or for partial compensation, perhaps from the primary lien holder. Given the loss this lien holder is already taking, is appears that only in rare circumstances would the existence of any significant subordinate liens not disqualify a homeowner from this program.

One last interesting detail, under this program the FHA will share 50-50 with the homeowner both the new equity created by the new reduced loan on the property, as well as in any future appreciation, payable upon sale of the property or payoff of the FHA loan by future refinancing

Helpful LINKS for more information on this story:
1) About two pages of answers to 10 questions in a FAQ’s format, from the U.S. Department of Housing and Urban Development (HUD):
2) A somewhat more detailed 4-page Summary of the Housing and Economic Recovery Act prepared for the public by the U.S. Senate’s Committee on Banking, Housing & Urban Affairs.
3) And for gluttons for absolute detail, all 636 pages of the Act (Pub.L. 110-389, H.R. 3221) are available at:

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,