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The United States Senate is currently debating an important piece of bankruptcy legislation which would change the way mortgages are handled in a Chapter 13 bankruptcy. The House of Representatives has already passed the bill. This new proposal would allow homeowners, as part of their Chapter 13 bankruptcy, to “cramdown” their mortgage to its fair market value, rather than what they owe. This, of course, benefits those who are holding mortgages that exceed the value of their house.

The new legislation, as it is currently written, would allow bankruptcy judges to order the modification of an existing mortgage, if:

• The homeowner requests a voluntary loan modification from the lender prior to filing,
• It is not a brand new mortgage, and
• The homeowner files for protection under Chapter 13 of the Bankruptcy Code.

If the above requirements are met, the new bill will allow the court to modify the existing loan by:

• Reducing the balance owed on the mortgage to the fair market value of the home,
• Beginning a new, 40-year mortgage as of the date of filing, and
• Setting the interest at a low fixed rate based on the prime rate as of the bankruptcy filing date.

This new legislation has the potential to help thousands of homeowners who have found themselves in mortgages where they owe far more than the house is worth, or who have found themselves with unaffordable payments due to an adjustable rate mortgage. It is supposed to work with the recently passed foreclosure legislation, which gives incentives to lenders to voluntarily modify loans. That legislation is not helping enough homeowners according to a study conducted by the National Association of Consumer Bankruptcy Attorneys (NACBA). (See http://www.nacba.com/s/66_c0142157dabe1a9/ for more details on this research.) This legislation would provide even more incentive for lenders to agree to modifications of home loans.

Senate Democrats are having trouble lining up the necessary votes to get the legislation passed, but it could go to a full vote in the Senate as soon as this month. The delay will be much longer if they are unable to schedule a vote before the April recess (when Congress takes a break). President Obama supports the legislation, and will probably sign the bill into law if it passes.

Seventh Circuit Decision Increases Amount Debtors can Deduct for Vehicles

On December 17, 2008, the United States Court of Appeals for the Seventh Circuit released a decision that allowed debtors who have filed for protection under the bankruptcy code to deduct $489 per month as an expense for up to two vehicles they own, regardless of whether they still owe on the vehicle or it’s paid off.

Before this decision, many bankruptcy judges only allowed the full means test deduction for vehicles that had a loan out against them, and allowed a much lower deduction for vehicles that were paid in full (for more information regarding the means test, please see other articles on this website). This 7th Circuit case out of Wisconsin, Marvin Ross-Tousey and Deborah Tousey v. William T. Neary, overturned the District Court’s previous decision, which allowed only a partial deduction for vehicles that were already paid off.

Now, all vehicles owned by a debtor can take the full ownership deduction provided in the means test.

The Seventh Circuit covers all federal bankruptcy courts in the states of Illinois, Indiana, and Wisconsin.

6th Circuit Decision on Waiting Period for 7 to 13 Filings

In a decision handed down on December 29, 2008, the Sixth Circuit ruled that the amount of time someone must wait between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy will be measured from the date the Chapter 7 is first filed, rather than the date the discharge was granted. The case, In re Sanders, states that the appropriate amount of time is measured from the date the first case was filed. This decision cuts four to five months off the amount of time that a debtor would have to wait to file a Chapter 13 bankruptcy if a Chapter 7 bankruptcy had already been filed.

These are just a few of the recent case developments regarding bankruptcy. Courts decide cases every day across the country. Sometimes the decisions conflict, so it is very important that you hire an experienced and knowledgeable attorney who stays current on case developments to help you with your bankruptcy case. Laws change, but judicial decisions can sometimes have more profound impacts on how bankruptcy cases are administered then legislation.

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