Recent anecdotal evidence suggests that creditors should expect to see a substantial increase in new Chapter 13 filings subsequent to passage of the “Helping Families Save Their Homes in Bankruptcy Act of 2009.” Many prominent debtor’s attorneys have indicated that they have a backlog of new cases waiting to be filed once this proposed Bill becomes law.
As the law is currently formatted, borrowers will have the ability through Chapter 13 to cram down an existing first mortgage to the current value of the home, while also extending the repayment period up to 40 years and locking in a new, fixed, lower interest rate. This option will obviously be quite attractive for the vast majority of troubled borrowers who were already contemplating bankruptcy and will also serve to draw in borrowers who had not considered bankruptcy before.
The benefits of the law will be limited to those mortgages in effect prior to the date the new law is enacted. Further, borrowers will be required to certify that, prior to seeking the benefits of this new cram-down provision, they had made an attempt to contact their lender to work out a loan modification.
In advance of this expected change in the law, creditors and their counsel should take proactive steps to prepare for the expected onslaught of cases and be prepared to litigate over the current values of homes serving as collateral for their loans. With recent filings already on a record pace, the only question remains: just how large of a spike will this new law create and how long will it last?
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