Wednesday, March 11, 2009

The Terms of the Bankruptcy Mortgage Cramdown Bill Passed by the House of Representatives--The Cramdown Itself

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

This Bankruptcy Bulletin presents the core cramdown provisions of the bankruptcy bill which was passed by the House of Representatives last Thursday, H.R. 1106. Each part of the bill outline below refers both to its pertinent Section number in the bill and to the Bankruptcy Code Section it proposes to amend. The full text of the engrossed bill is as passed by the House is at either of these two website: one by and the other by the Library of Congress' THOMAS.

(See my Bulletin of last Friday, March 6, on the passage of this bill in the House, the amendments offered on the floor, and the legislation's prospects in the Senate. An upcoming Bulletin addresses other aspects of the bill affecting Chapter 13, including a major but selective expansion in the jurisdictional debt limits, new rules governing post-petition fees of mortgage creditors, and the bill's applicability to previously filed cases.)

Mortgages eligible for Chapter 13 cramdown (H.R. 1106 Section 103; Bankruptcy Code Section 1322(b)(11)):
  • All mortgages secured by "principal residence" after receiving notice of potential foreclosure.
  • Not restricted to sub-prime or any other category of mortgages.
  • Does NOT include mortgages entered into after the law goes into effect.
Mortgage modifications permitted (Bill Section 103; Code Section 1322(b)(11)):
  • Reducing principal to the value of the residence.
  • Stopping postpetition interest rate adjustments.
  • Extending the term of payment to as long as a total of 40 years.
  • Adjusting interest to the rate as published by the Federal Financial Institutions Examination Council, "plus a reasonable premium for risk."
Payments on modified mortgages may be paid (Bill Section 103; Code Section 1322(b)(11)):
  • "[D]irectly to the holder of the claim."
  • "[T]hrough the trustee during the term of the plan," "at the discretion of the court."
The court may confirm a plan with a mortgage modification that reduces the interest rate but not the principle, if (Bill Section 105; Code Section 1325(d)):
  • The "total monthly mortgage payment is reduced to a percentage of the debtor's income in accordance with the guidelines of the . . . Homeowner Affordability and Stability Plan as implemented March 4, 2009."
  • Allowing for expenses permitted under section 707(b)(2).
  • The debtor could prevent foreclosure and pay a 30-year fully amortizing loan at the reduced interest rate without reducing principle, after allowing for "additional debts and fees that are to be paid in this chapter and thereafter."
Valuation of principal residence for cramdown (Bill Section 103; Code Section 1322(i)):
"Allowed secured claim" is the fair market value of the residence.
If there is a dispute about value, the court determines the value through the appraisal rules of the Federal Housing Administration.

Distribution of post-petition sale proceeds of principal residence (Bill Section 103; Code Section 1322(g)):
  • For sales during 1st year of the Chapter 13 plan, 90% of net proceeds would go to the mortgage holder
  • During the 2nd year, 70%.
  • During the 3rd year, 50%.
  • During the 4th year, 30%.
  • During the 5th year, 10%.
Debtor's prepetition effort to modify mortgage (Bill Section 103; Code Section 1322(b)):
For Chapter 13 cases filed after 30 days after the law's effective date--
  • Timing: Debtor must contact lender or servicer at least 30 before filing the case about modifying the mortgage.
  • Must provide lender or servicer with information about income, expenses, and debt, in a format like the bankruptcy schedules.
  • Must consider any "qualified loan modification"--a newly defined term--presented by the lender or servicer.
  • These requirements are waived if a foreclosure is scheduled within 30 days after filing the Chapter 13 case.
For cases filed before 30 days after the law's effective date--
  • Timing: Must attempt to contact lender or servicer about mortgage modification before filing an initial Chapter 13 plan, or a pre-confirmation or post-confirmation plan (no stated length of time).
Definition of "qualified loan modification" (Bill Section 100; Code Section 101(43A)):
  • Mortgage modification agreement made under the guidelines of the Homeowner Affordability & Stability Plan.
  • Debtor's aggregate housing payment does not exceed a percentage of income consistent with those guidelines.
  • Scheduled payments fully amortize the outstanding loan principal without any periods of negative amortization.
  • May not require debtor to pay any fees to participate.
  • Can't be affected by debtor's filing of a bankruptcy.
Mortgage modification requires court's finding of debtors' good faith (Bill Section 105; Code Section 1325(a)):
  • No good faith if debtor "can pay all of his or her debts. . . without difficulty for the foreseeable future."
  • These debts include "any future payment increases on such debts.
  • These payments include "the positive amortization of mortgage debt.
  • "No good faith if court finds that debtor was "convicted of obtaining by actual fraud the extension, renewal, or refinancing of credit" at issue.
A reduction in mortgage principal requires a court determination of good faith (Bill Section 105; Code Section 1325(a)):
Court must consider whether the mortgage holder had offered an affordable "qualified loan modification" without principal reduction.

Modified mortgage holder retains lien on residence (Bill Section 105; Code Section 1325(a)):
Until the later of a) the payoff of the secured claim, or b) completion of all plan payments (or hardship discharge)

Exclusion of modified mortgage balance from discharge (Bill Section 106; Code section 1328(a)):
Discharge at end of Chapter 13 case excludes the unpaid portion of the "allowed secured claim."

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys