Bankruptcy is typically one with the last resorts that homeowners facing foreclosure rely on to get some respite. The social and economic stigmas that come with this method are typically adequate to scare away numerous people from filing. Even so, in the right situation, bankruptcy might be a potent tool to obtain a short break from an accelerating foreclosure procedure and bring the mortgage lender as well as other creditors back to the negotiating table.
There’s also a slight possibility that bankruptcy court judges may be granted a lot more energy to work out solutions in favor of homeowners. One proposal floating about Congress to fix the foreclosure crisis involves permitting these judges to decrease the total amount homeowners owe on a mortgage loan. Bankruptcy courts don’t currently have this energy, as well as the proposal is actually a response towards the sharp declines in house values that have made some homeowners owe far more than their properties are worth.
Presently, homeowners who file Chapter 13 bankruptcy to stop foreclosure are unable to decrease the quantity they owe on the mortgage on their main residence through the legal approach. Second homes, investment properties, or vacation houses are eligible for some additional relief within the form of debt reduction, but the mortgage company is protected on the primary residence. This can be mainly what the proposal in Congress is attempting to address.
The bill, although, will not simply pass to turn out to be law. Even if the proposal passes with majorities in both Houses of Congress, the president has threatened to veto the bill as interfering together with the right of homeowners and mortgage lenders to enter into voluntary contracts. If banks’ loans might be altered later on via bankruptcy, they would be far more inclined to raise interest rates to collect a lot more money straight away. Giving this power to the bankruptcy judges would also make it much more challenging for borrowers with poor credit to get a mortgage at all, for fear of having the loan amount decreased.
There is certainly also the quite real possibility that, if the proposal looks like it’ll pass, more lenders will move towards foreclosure more quickly. They will try to have the properties sold at sheriff sale and get the property listed in the marketplace as soon as probable, so the homeowners don’t even have enough time to consider the possibility of filing bankruptcy. This would cause a bad foreclosure crisis to obtain even worse in a very short period of time.
There could possibly be a lot of benefits to the new laws, if the proposal had the prospective to pass, and many homeowners presently deeply underwater in their loans no longer feel as fantastic an incentive just to give up on the residence. Negotiating a lower mortgage balance could persuade some of these people to remain within the house and pay a fair price for the right to remain in the property. And not all banks are willing to negotiate mortgage modifications, so the strength of a bankruptcy judge on the side with the homeowners might allow much more people to stop foreclosure in the long run.
Unfortunately, it looks as if this one attempt to give the people much more energy more than the banks will fail. And with all of the negative consequences of foreclosure and bankruptcy which will haunt homeowners for years after the truth, the mortgage lenders will continue to hold Americans hostage to costly mortgages on overvalued properties. Filing bankruptcy to stop foreclosure might be a really welcome last resort for homeowners in danger, however it looks as if they are going to not be given the likelihood to negotiate in the courts to work out any better terms for their loans.