Bankruptcy Law Changes

There's a sense of inevitability that Congress will amend the Bankruptcy Code to allow judges to modify home mortgages. Currently, in a Chapter 13, all a debtor can do is catch up on his or her back payments. In the meantime, he has to keep his ongoing payments current. Under proposals in both theHouse and Senate, Chapter 13 would be amended to permit a judge to write down the amount of a loan to the value of the house, if the house is now worth less than what's owed on it. This is a process called "cram down", from the phrase "cram it down the throat of the creditor", that is, force the creditor (who usually objects) to accept the lower value.

There's a good deal of debate about the wisdom of such a proposal. Those opposed say it will raise the lending costs to everyone. Banks will never be sure that they will get paid in full or that they won't have a lower value crammed down on them. As a result, they will raise lending rates to everyone to spread the risk of the relatively few bankruptcies over all borrowers. Thus, we'll all end up paying for those people who can't pay for themselves. But that's what we're all doing with the bailout anyway. Those people who were responsible are going to pay for the $835 billion in new assistance that was just signed into law by President Obama.