What exactly does H.R. 1106, as passed by the House, provide to allow loan modification in bankruptcy?
| SEC. # | OLD LAW | NEW LAW | WHAT IT MEANS |
|---|---|---|---|
| 101(43A) | Adds a definition of "qualified loan modification" as one that 1) reduces the debtor's payment to a percentage of the debtor's income without any negative amortization; 2) requiers no fees or charges for the modification; and 3) permits the debtor to continue payments even if a bankruptcy is filed. |
Defines what a modification should/shouldn't include and thereby limits the kinds of things lenders were doing and calling it modification, such as keeping the monthly payment the same. | |
| 109(e) | Sets debt limits on who can file a Chapter 13 bankruptcy. | Amends the section to exclude debts concerning the debtor’s principal residence. 1. If the current value of the home is less than the secured debt limit; or |
If total mortgage debt was more than $1,010,000, you weren’t eligible for a chapter 13; but under the new law, you will be. |
| 109(h) | Requires credit counseling to file a bankruptcy. | Eliminates the need for credit counseling before filing if the debtor submits a letter that she has received notice that a foreclosure may commence. | Allows emergency filings to save homes from foreclosures without the need to complete credit counseling. |
| 502(b) | Allows mortgage companies to file claims even though they are in violation of the Truth in Lending Law. | Prohibits lender from filing a claim in the bankruptcy case if the company has failed to comply with any requirement under the Truth in Lending Law. |
Greatly limits the rights of mortgage companies to file claims in the bankruptcy case when they have not acted in compliance with federal law. |
| 1322(b) | Specifically denies to debtors the right to modify mortgages on their principal residence in a Chapter 13 bankruptcy. | Allows modification of mortgages for principal residences when a notice that a foreclosure may be started is given. Allows judges to determine the amount of the loan that is treated as secured, and what part is to be treated as unsecured. Allow extensions of the pay-back period and modifications of the interest rates charged. | Sweeping change that will allow judges to change the interest rate of the loan, stop adjustable rates, and limit the amount that can be collected as a secured debt. |
| 1322(c) | Allows the mortgage companies to charge fees during a chapter 13 bankruptcy | Limits mortgage companies from filing claims for fees unless the fee is lawful under non-bankruptcy law, the value of the debtor’s home exceeds the amount owed on it, and the mortgage company files an annual report with the court. Also allows the bankruptcy court to waive any prepayment penalty. |
Stops mortgage companies assessing undisclosed fees during a bankruptcy. Allows a homeowner to refinance or sell her home without paying any prepayment penalty required under the loan. |
| 1322(g) | Specifies that the homeowner in a Chapter 13 may have to pay back part of the amount their mortgage was reduced if the property is sold at a profit before completing the Chapter 13 | If a homeowner sells her home before the completion of the bankruptcy after modifying the loan, she will pay the lender a percentage of the profit above the reduced loan principal: 1) 90% if sold during the first year; 2) 70% in the second year; 3) 50% in the third year; 4) 30% in the 4th year; 5) 10% in the 5th year. |
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| 1322(h) | Adds a provision that ensures that the debtor has sought a voluntary modification at least 30 days prior to filing the bankruptcy. Allows an exception where a foreclosure sale is pending within 30 days of the bankruptcy filing. | Requires debtors to seek a voluntary modification from their lender at least 30 days prior to filing the bankruptcy, having completed appropriate income and expense schedules for the lender and considered any qualified loan modification offered (unless a foreclosure sale is scheduled within 30 days of the filing. If the homeowner is already in bankruptcy, they must seek modification of the mortgage before asking the court for modification. |
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| 1322(i) | Defines the value of the home for purposes of modification as the "fair market value" according to the appraisal rules of the Federal Housing Authority | Forces a formal appraisal of the house if the value is contested. | |
| 1325(a) | Permits a creditor to maintain his lien on the property until debt is paid or the debtor gets a dischargeAlso requires that any modification be made in good faith. | Creates certain safeguards for creditors, including a provision that the modification is done in good faith. | |
| 1328 | Specifies that the discharge of the debtor doesn’t relieve her of paying the unpaid secured portion of the mortgage. | Allows the discharge of any unpaid unsecured debt including that portion of the mortgage that is deemed by the modification to be unsecured; but doesn’t allow the discharge of the secured portion. |
The act will go into effect when signed by the President. It will apply to cases filed before enactment as well as those filed afterwards. Thus existing Chapter 13 plans can be modified to take advantage of the change.