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Dodd Announces Bankruptcy Reform Legislation

Bill would undo 2005 industry-sponsored changes

By Martin H. Bosworth
ConsumerAffairs.com

November 28, 2007

"[I]ndividuals are forced into bankruptcy by a devastating medical event or the loss of a job," Dodd said. "Our bankruptcy laws should not punish these vulnerable members of our society, but instead should help them get back on their feet while protecting them and their families from added suffering at the hands of creditors.”

Dodd's proposed legislation would empower judges to consider individual circumstances when a debtor declares bankruptcy, would make private student loan debt and medical debt dischargeable in bankruptcy, and enable bankruptcy courts to restructure mortgage debts so that debtors do not lose their homes if they declare bankruptcy.

Under current bankruptcy law, individuals declaring Chapter 7 bankruptcy must submit to a "means test" to determine how much income they have available to pay debts.

The means test does not distinguish causes of debt, so individuals who are declaring bankruptcy due to medical debt or job loss are treated the same as those who are trying to escape credit-card debt.

Individuals who are deemed by the means test to have enough money to pay even some of their debts are shunted to Chapter 13 bankruptcy and put on a plan to pay back their creditors, regardless of the result on their families.

Existing bankruptcy law already makes it difficult for owners of a primary residence to hold onto their homes when declaring bankruptcy. Research by the Center for Responsible Lending found that it was easier for owners of boats and second homes to gain debt relief in bankruptcy than primary owners of homes.

Dodd has made bankruptcy reform legislation a primary plank of his presidential campaign. As chairman of the powerful Senate Banking Committee, Dodd has flexed his muscle in recent months by pushing for predatory lending reform legislation,and holding hearings on abusive credit card industry practices.

Foreclosures

An estimated 2.2 million families are still in danger of losing their homes to foreclosure because they are trapped in "exploding" adjustable-rate mortgages (ARMs) that are due to increase to unaffordable interest rates.

In fact, hundreds of thousands of families face rate increases at the same time that their houses are worth less than the balance on their mortgage.

Unable to find buyers, the CRL says these homeowners can’t even refinance.

Loan servicers who could modify loans to make them more affordable aren't doing so. The group cites a recent report by Moody's that loan servicers had only modified one percent of mortgages that increased to higher rates in January, April and July of this year.

“Unless Congress takes action, these families lose homeownership, surrounding neighborhoods lose property value, and the entire economy suffers,” the group warned.

The problem, it says, boils down to the law. Current bankruptcy law excludes home owners from relief now available to boat owners.

“People who own investment properties, vacation homes and boats are allowed to get loan modifications as part of debt relief, but the law specifically excludes homeowners from similar protections,” CRL said. “We urgently need legislation that would allow lenders and loan servicers to modify mortgages to allow families to continue paying on their loans and keep their home.

"This would provide judges the authority to modify harmful mortgages marketed by subprime lenders in recent years, and would help more than 600,000 financially-troubled families keep their homes,” the group argued.

The consumer group has done a lot of the research for Congress already. It says by deleting the phrase in section 1322 of the bankruptcy law that excludes, alone, the mortgage on a borrower's principal residence from the chapter 13 section, lawmakers would give bankruptcy judges the authority to modify secured debts.

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