Wednesday, November 05, 2008

Letter to Senators Schumer and Clinton regarding allowing Bankruptcy Judges to modify mortgages in Chapter 13 bankruptcy

Dear Senators Schumer and Clinton:

I wanted to congratulate you on a spectacular election for Senate Democrats. Both of you deserve a great deal of credit for your roles in last night’s gain of seats for your caucus in the Senate.

I am a bankruptcy and real estate attorney with over 15 years of experience representing individuals and businesses in personal and business bankruptcy (my firm has filed hundreds of bankruptcy petitions) and have represented both debtors and creditors. As you are both aware, housing values have decreased substantially, the value of many houses is less than the amount of their mortgage(s) and foreclosure rates are rising geometrically throughout the country.

The solution to this housing crisis is to allow bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases. I believe that this change in law would be beneficial to both homeowners and to banks. Rather than people losing their houses in a foreclosure proceeding, Chapter 13 would provide a mechanism whereby a debtor (borrower) prepares a plan to pay the bank the arrears due under a mortgage over a three to five year period and retain their house. It would seem to me, that banks would rather be paid monies due them secured by their mortgages, than own devalued residential real estate.

Several law and finance professors have done studies which have shown that allowing homeowners to modify their mortgages in Chapter 13 would not negatively impact banks. The proof is actually simple, since under the present law, judges in Chapter 13 cases are allowed to modify mortgages on investment properties and vacation homes There has been no significant impact or effect on mortgages on those properties. Common sense would dictate that the law should be changed to allow bankruptcy judges to modify mortgages on individual’s primary residences as well.

Additionally, in 2005 Congress passed BAPCPA (the Bankruptcy Abuse and Consumer Protection Act), which greatly changed personal and business bankruptcy. One of the requirements of the new law is mandatory credit counseling, both prior to a bankruptcy filing and after the bankruptcy filing. These classes take approximately three hours and they cost a debtor $90-150. Studies have shown that mandatory credit counseling has little impact on an individual’s subsequent bankruptcy filing. I believe that the statistics show that 97% of all people who take the initial credit counseling course file a Chapter 7 bankruptcy petition, notwithstanding the credit counseling. The requirement of mandatory credit counseling increases the cost of bankruptcy and prevents the filing of emergency bankruptcy petitions to save individual’s houses from foreclosure, and should be repealed by Congress.

Now that Democrats have increased their control of the Senate and President-elect Obama has expressed his support for allowing bankruptcy judges to modify mortgages in Chapter 13 bankruptcy cases, we would hope that either of you would propose legislation to remedy these issues. If you or your staff have any further questions, please do not hesitate to contact the undersigned. Your attention to this matter is appreciated.

James Shenwick

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