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Senate To Debate Bankruptcy Law Changes

Changes would help homeowners facing foreclosure

February 25, 2008

Lawmakers are tentatively scheduled to debate the proposal on Tuesday.

"Home ownership is a pillar of our economy, and an integral part of the American dream. But the headlines that have filled the newspapers lately have described a nightmare," said Sen. Richard Durbin (D-IL), author of the bill.

"Thousands of families are losing their homes, and millions more are at risk of foreclosure. Whatever the reason that families may find themselves unable to pay their mortgages, the effect of foreclosure is the same: disaster for the family, for the surrounding neighborhood, and for the economy," Durbin said.

The provisions of Durbin's bill have been folded into the Democratic foreclosure prevention package introduced earlier this month. Durbin says hundreds of thousands of homeowners would be able to modify their mortgages in bankruptcy to avoid foreclosure if his legislation were signed into law.

By some estimates, the collapse of the subprime mortgage market has put approximately 2.2 million families in danger of losing their homes. Durbin's bill, The Helping Families Save Their Homes Act, will allow these families, as a last resort, to file for Chapter 13 bankruptcy and work with a judge and the lender to modify the mortgage so families can make affordable payments and keep their homes.

"The law should give American families facing foreclosure the opportunity to negotiate a workout on their mortgages. This bill may help them reach a degree of financial stability -- even when the market cannot," Durbin said. "Small changes to an outdated bankruptcy code could help over 600,000 at risk families keep their homes, while affordably paying back their obligations. We should be giving families every reasonable tool to ensure they can keep a roof over their heads."

Durbin says virtually every type of personal debt, including vacation homes and family farms, can be restructured in bankruptcy with the exception of mortgages on a primary residence. This exception dates to the 1970's, when most mortgages were fixed rate, long term agreements between local bankers and their neighborhood customers.

These days, says Durbin, mortgages on primary residences are often now the primary cause of financial distress. This bill, he says, would help the bankruptcy code catch up with this shift.

Durbin's bill has received broad support from groups which include: AARP; AFL-CIO; Consumer Federation of America; Consumers Union; NAACP; National Association of Consumer Bankruptcy Attorneys; National Council of La Raza; National Fair Housing Alliance; National Urban League and SEIU.

The effects of foreclosure are widespread. The U.S. Conference of Mayors recently issued a report projecting that the foreclosure crisis will result in 524,000 fewer jobs being created this year, a drop in consumer spending, a loss of billions in tax revenues, and slower growth of the U.S. GDP.

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