Federal Bailout Legislation May Contain Changes to the Bankruptcy Code

By: Alan C. Hochheiser, Esq. and John L. Day, Jr., Esq.

The massive federal bailout of Wall Street may contain revisions to the Bankruptcy Code which would permit bankruptcy judges to modify residential mortgages.  As we previously reported to you, Congressional Democrats have wanted to allow bankruptcy judges to reduce a debtor’s residential mortgage payments, change an interest rate from variable to fixed, and extend the repayment period to thirty years. This proposal seemed dead for this session, until the federal bailout was announced this past weekend. Now,  changes to the bankruptcy code are being included in discussions between the White House and Congressional Democrats, along with the issues of executive pay and allowing the government to take equity positions in the companies it bails out.

In the Senate, Banking Committee chair, Chris Dodd, is offering draft legislation which provides that bankruptcy courts may provide for payment of the mortgage by paying an amount equal to the “allowed secured claim; (ii) for a period that is not longer than 40 years; and (iii) at a rate of interest… at a fixed annual percentage rate, in an amount equal to the most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk.”

Senate Majority Leader Harry Reid, D-Nev. explained that wealthier homeowners often find it easy to seek mortgage assistance from bankruptcy judges, but that those who aren’t wealthy cannot. “That makes no sense, and we should change it,” he said, by giving bankruptcy courts the authority to “reach mutually beneficial arrangements to allow families to keep their homes and prevent more foreclosures.”

According to FinancialWeek.com, Treasury Secretary Henry Paulson, who proposed the plan over the weekend, has not yielded on two key requests of Democrats: to limit the pay of corporate executives whose firms are being bailed out, and to let bankruptcy judges modify mortgage terms for struggling homeowners.

We will continue to monitor this situation and keep you advised as it progresses.

If you have any questions on this information, please contact Mr. Alan C. Hochheiser, Esq. or John L. Day, Jr., Esq.

Mr. Hochheiser is the managing partner of Bankruptcy with the Real Estate Default Group at Weltman, Weinberg & Reis Co., L.P.A. in Brooklyn Heights, Ohio. Mr. Hochheiser can be reached at (216) 739-5649 or via e-mail at ahochheiser@weltman.com.

Mr. Day is a partner in the Bankruptcy Department of the Real Estate Default Group at Weltman, Weinberg & Reis Co., L.P.A. in Cincinnati, Ohio. Mr. Day can be reached at (513) 723-2206 or via e-mail at jday@weltman.com.

Client Advisory is published by Weltman, Weinberg & Reis Co., L.P.A., an organization providing comprehensive creditor representation.  The information contained in this advisory is a summary of legal information and is not intended to constitute legal advice on specific matters or create an attorney-client relationship.  Contact any of our offices or visit our website at realestatedefaultgroup.com for more real estate related information, company facts and attorney profiles. ©2008


One thought on “Federal Bailout Legislation May Contain Changes to the Bankruptcy Code

  1. I think the concept of allowing judges to alter mortgage rates is good in that it could allow for an a creditor to continue collecting an otherwise dead account, however I also think that it needs to be very carefully thought out. The potential for abuse by larger institutions and even home owners does exist.

    I do think it is a step in the right direction.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s