Legal News

Will Bankruptcy Judges Get Power to Strip Down?

By Ashby Jones

The details of the Great Bailout Bill of 2008 are still being mulled, turned over and kicked about by economists, pundits and members of Congress. Another group sitting up and taking notice: bankruptcy judges. Congressional Democrats hope to include legislation that would allow U.S. judges to modify mortgages for people in bankruptcy proceedings. Here are stories from the WSJ’s Amir Efrati and the National Law Journal’s Marcia Coyle.

Current bankruptcy law allows judges to approve the modifications of the terms of certain debts, namely auto and student loans and second-home mortgages. Under the Democrats’ proposal, judges could approve individuals’ reorganization plans that would allow debtors to pay a lower interest rate for their primary-residence mortgages. Furthermore, if the value of the property falls below the loan amount, debtors potentially could reduce the balance of the loan to equal the current value of the property — a process commonly known as a “cram down” or “strip down.”

Bankruptcy judges appear generally in favor of the proposal. “The government is providing a trillion dollars in assistance to financial institutions to deal with the people that can’t afford to pay mortgages, so there ought to be something in the program to help people pay their mortgages,” said Samuel L. Bufford, a U.S. bankruptcy judge in Los Angeles. “It’s a matter of fairness.”

Opponents — like the WSJ’s editorial page — however, argue that the new bill’s language is too expansive: Homeowners who simply had made bad borrowing decisions could be bailed out. For instance, bankruptcy scholar Mark Scarberry of Pepperdine University (pictured) told the NLJ he strongly opposes it.

“If you have this write-down possibility, think of the people who will become even less able to get financing for a home,” said Scarberry. The people who are least responsible, he said, are the only ones who get any benefit.

Full post as published by Law Blog - WSJ.com on September 24, 2008 (boomark / email).