With the proposed amendments to the Bankruptcy Code placed on temporary hold by Congress until at least late April, it seems appropriate to take a step back and examine the possible unintended consequences of the passage of such a law.
While providing troubled borrowers with an effective tool to rework their mortgage terms under the protection of the Bankruptcy Code, is it possible that the mere threat of such a modification by a borrower could lead an increasing number of lenders to agree to rework the loan terms outside of the bankruptcy process?
Debtor’s counsel have always operated with the knowledge that, while they have the ability to tie up a pending foreclosure for months or even years by aggressively opposing the case, the reality has always been that mortgage lenders held the upper hand once a Chapter 13 bankruptcy was filed. A borrower could not alter the terms of the loan, but could only seek breathing room to bring delinquent payments current.
If the proposed amendments become a reality, the leverage will clearly shift into the borrower’s favor, which may lead more and more lenders to seek a negotiated modification prior to bankruptcy, saving both sides from litigating over valuation of the home and risking assessment prior to plan confirmation. The end result could be a decrease in Chapter 13 filings within the pool of borrowers who, but for their mortgage delinquency, might not be in financial difficulty.
Of course, the flip side to this argument would be that with all the economic indicators clearly showing a downturn, the actual number of borrowers whose only financial difficulty consists of their mortgage, is likely becoming smaller and smaller each month. Therefore, it is likely that even with the offer of a voluntary loan modification by the lender, the vast majority of borrowers will still seek bankruptcy relief.
If Congress passes the statute permitting “cram down” of residential mortgages, courts will likely see an increase in hearings where the bankruptcy court will need to determine the value of the debtor’s residence. In a typical valuation hearing, the debtor and the lender both present expert witnesses who have appraised the property and testify as to the value of the residence. Currently, such hearings are infrequent. Chapter 13 trustees and the courts are developing new procedures to handle the increased number of valuation hearings.
Marge Burks, the Chapter 13 Trustee for the Southern District of Ohio in Cincinnati, announced several procedures to deal with the increased valuation hearings. First, they will NOT adjourn any confirmation hearings in order to accommodate parties that have not yet completed an appraisal by the date of the hearing. According to the local bankruptcy rule, if no agreement is reached as to value at the conclusion of the meeting of creditors, an “appraisal shall be conducted within six (6) days of the meeting of creditors.” Second, if there is an objection filed by the mortgage holder as to valuation of the real property, all parties will meet at the trustee’s office at least seven (7) to fourteen (14) days prior to the confirmation hearing and attempt to resolve the differences in value. If no agreement is reached, the Court will hear the objection at the scheduled confirmation hearing. Appraisers for both the mortgage holder and the debtors must be present at the confirmation hearing and prepared to go forward at that time with their evidence. Third, when conducting the valuation hearing the court will allow twenty (20) minutes for each side to present their case.
The trustee is holding the lender’s feet to the fire with these rules. It essentially requires lenders to attend all first meetings of creditors and to have an appraisal performed only a few days later. Following the proposed procedures will be a significant challenge and increase the costs of contesting value.
