For years, despite all the amendments to the Bankruptcy Code, one thing has remained untouchable: A debtor cannot modify the terms of her first mortgage that secures a debt on her primary residence. Debtors have been able to modify car loans, second mortgages, mortgages on vacation properties and a host of other loans for years, but first mortgage loans remained sacrosanct. All a debtor can do is catch up any arrearage through her plan, but she has to make all future payments (beginning with the payment that is next due after filing) on time and in the amount originally agreed.
The process of modifying a secured debt in bankruptcy is often called "cram down," from the graphic notion that the debtor crams the terms of the new loan down the creditor's throat with the help of the Bankruptcy Code. What happens is the debtor proposes a plan that repays the creditor only the value of its collateral. With cars, this is almost always less than what is owed. Since the housing crisis began three years ago, more and more homes are underwater and debtors want to be able to "refinance" their loans for lower principal amounts through the bankruptcy courts.
Senator Jeff Merkeley of Oregon is renewing the idea of allowing cram down for mortgages. The last attempt in 2009 failed, but this time there may be added ammunition: The housing market is still in the toilet, the job market stinks, the much-touted HAMP and other government programs to provide mortgage relief are dismal failures, and voluntary modifications by banks just don't happen. Stories of people sending the same documents a half dozen or more times and getting the runaround for months are legion. All of these things together might mean the economic and political climate are right to permit mortgage cram downs.
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