The Primary Residence Exception: Legislative Proposals in the 110th Congress to Amend Section 1322(b)(2) of the Bankruptcy Code

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

The U.S. housing market began to slow in early 2006 and has led to what many economists
believe is the worst housing finance environment since the Great Depression of the 1930s. As a
result, there has been a significant rise in late mortgage payments, foreclosures, and bankruptcies
nationwide. Many believe the market will get worse in the absence of changes in laws and/or
regulations. Additionally, there are a number of obstacles that may discourage mortgage servicers
and creditors from performing loan modifications in advance of a petition for bankruptcy, even in
situations in which a modification would be the most economically beneficial outcome for the
majority of interested parties. These obstacles include potential contract liability, tax regulations,
accounting standards, and payment schemes. Allowing bankruptcy courts to modify debts secured
by the debtor’s primary residence is seen by proponents as encouraging the modification of
mortgages before default or delinquency.
Bankruptcy provides an avenue by which debtors may get relief from their debts. Chapter 13 of
the U.S. Bankruptcy Code governs reorganizations for most individuals. The Code provides
courts some leeway to adjust the value of certain debts. For many secured debts, the court has
“strip down” – also, commonly referred to as “cram down” – authority. Strip down is the power to
lower, over the creditor’s objections, the secured claim to as low as the collateral’s fair market
value and treat the balance of the debt as an unsecured claim. However, Section 1322(b)(2) of the
Code prohibits the strip down of debts secured by the debtor’s primary residence.
At least three bills that would amend Section 1322 of the Bankruptcy Code have been introduced ^th
in the 111 Congress. These bills are S. 61 and its House companion, H.R. 200 (the Helping
Families Save Their Homes in Bankruptcy Act of 2009); and H.R. 225 (the Emergency Home
Ownership and Mortgage Equity Protection Act).
This report provides an overview of the general Chapter 13 process and analyzes how these bills
would amend certain sections of Chapter 13.

Mortgage Market Backdrop............................................................................................................1
Overview of Chapter 13..................................................................................................................4
Bill Comparisons.............................................................................................................................6
S. 61 and H.R. 200....................................................................................................................6
H.R. 225....................................................................................................................................8
Author Contact Information............................................................................................................8

The U.S. housing market began to slow in early 2006 and has led to what many economists ¹
believe is the worst housing finance environment since the Great Depression of the 1930s. As a
result, there has been a significant rise of late mortgage payments, foreclosures, and bankruptcies ²
nationwide. Many believe the market will get worse in the absence of changes in laws and/or
regulations. For instance, Sheila Bair, Chairman of the Federal Deposit Insurance Corporation,
testified before the House Committee on Financial Services on November 18, 2008, that “over the
next two years, an estimated 4 to 5 million mortgage loans will enter foreclosure if nothing is ³
done.”
In an attempt to stem the tide of foreclosures and bankruptcies, a number of voluntary loan ⁴
modification programs have been initiated. These programs seek to make mortgage payments
more affordable to homeowners who are having, or likely will have difficulty meeting their
mortgage obligations, while also avoiding the costs for both debtors and creditors associated with
a foreclosure or bankruptcy. However, there are a number of obstacles that have operated to
discourage mortgage servicers and creditors from performing loan modifications in advance of
foreclosure or a petition for bankruptcy, even in situations in which a modification would be the
most economically beneficial outcome for most interested parties. These obstacles include ⁵
potential contract liability, tax regulations, accounting standards, and payment schemes.
Some argue that these voluntary modification programs have not been effective enough. In a
letter sent to Speaker of the House Nancy Pelosi and House Minority Leader John Boehner, the
Attorneys General of 22 states and the District of Columbia stated:
^In^recen^t^m^oⁿ^t^hs^{, State Attorn}^e^y^s^Gen^e^{ral h}^a^v^e^es^peciall^y^f^o^cu^s^e^{d on}^u^r^ging^m^o^rt^g^a^g^e
^s^e^rv^icers^{to av}^oid^uⁿⁿ^eces^s^a^r^y^f^o^reclos^u^r^es^b^y^m^odifyⁱⁿ^g^unaf^f^o^{rdable loans}ⁱⁿ^a^m^aⁿⁿ^e^r
^t^h^a^t^se^r^v^e^s^ho^l^d^e^r^s,^se^r^vⁱ^c^e^r^s,^ho^m^e^o^wⁿ^e^r^s^,^aⁿ^d^t^h^e^p^u^b^lⁱ^c^.^T^h^r^o^{ugh t}^h^e^mu^l^tⁱ^-st^a^t^e
^Foreclos^u^r^{e P}^r^ev^en^tion^W^o^rk^ing^Grou^p,^w^e^{collected data}^w^h^ich^de^m^oⁿ^s^trate^s^th^at

¹^S^ee,^e.^g^.^{, Jo}^{n Hilse}ⁿ^ra^the^r^,^Se^reⁿ^a^Ng^{, a}^{nd Da}^mⁱ^aⁿ^P^a^le^tta^,^W^o^rst^{Crisis Sinc}^e^the^‘^30s,^W^{ith N}^o^Eⁿ^{d Ye}^{t i}ⁿ^Sig^h^t^,
^W^a^{ll Str}^e^e^t^J^our^na^l,^Se^pt.¹⁸^,²⁰⁰⁸^{, a}^v^a^ila^ble^a^t^htt^p^://^on^line^.^w^s^j.c^o^m^/^a^r^tic^le^/SB¹²²¹⁶⁹⁴³¹⁶¹⁷⁵⁴⁹⁹⁴^7.htm^l⁽^“^‘^T^his^ha^s
^b^een^t^h^{e w}^o^rst^fⁱⁿ^aⁿ^cⁱ^a^l^cri^sⁱ^s^si^{nce t}^h^{e G}^r^eat^Dep^r^es^si^oⁿ^.^T^h^e^r^e^is^no^que^sti^{on a}^b^o^u^{t it}^{,’ sa}^id^Ma^rk^G^e^rtle^{r, a}^Ne^w
^Y^o^r^k^Uⁿ^iv^e^r^sⁱ^t^y^e^c^onom^is^t^w^ho^w^o^r^k^e^d^w^{ith f}^e^llow^ac^a^d^em^ic^B^e^{n B}^e^rⁿ^aⁿ^k^e^{, n}^o^w^the^Fe^de^r^a^{l R}^e^s^e^r^v^e^c^h^aⁱ^r^m^aⁿ^{, to}
^e^x^plaⁱ^{n how}^fⁱ^na^nc^ia^{l tur}^m^{oil c}^aⁿ^inf^e^c^t^the^ov^e^r^a^{ll e}^c^onom^y^.^”⁾^.
²^S^ee^{CRS Rep}^o^{rt RL}³³⁹³⁰^,^Su^bp^rⁱ^m^e^M^o^r^t^gage^s^:^Pr^im^e^r^oⁿ^C^u^r^r^e^{nt Le}ⁿ^dⁱⁿ^g^and^For^e^c^l^os^ur^e^I^s^s^u^e^s^{, by}^Edw^a^{rd V}^.
^M^u^rp^h^y^{. Ch}^ap^{ter 1}³^f^ilin^g^sⁱⁿ^FY2⁰⁰⁸^w^e^{re u}^p¹⁴^%^f^r^o^m^th^{e sa}^m^e^p^e^rio^d^{a y}^{ear b}^e^f^o^{re, acco}^rdⁱⁿ^g^t^o^{a Dec. 1}⁵^{, 2}⁰⁰⁸
^pre^{ss re}^le^a^s^e^b^y^the^{U.S. Co}^urts^[a^v^a^ila^ble^a^t^http://w^ww^.usc^ourts.g^ov^/P^re^ss_Re^le^a^s^e^s^/200^8/
^Ba^nk^ruptc^y^Filing^s^D^e^c^2008.c^f^m^]^{. It is}^uⁿ^c^l^e^a^r^how^m^u^c^h^of^thisⁱⁿ^c^r^e^a^s^e^w^a^s^dire^c^t^l^y^re^la^te^{d to m}^o^rtg^a^g^e^de^bt.
³^S^t^at^em^en^t^o^f^S^h^ei^l^a^C.^Bai^r^,^Ch^ai^rman^o^f^t^h^{e F}^e^d^e^ral^Dep^o^sⁱ^t^In^s^u^r^aⁿ^{ce Co}^rp^o^r^atⁱ^o^n,^O^v^e^r^sⁱ^{ght of}^I^m^ple^m^eⁿ^tati^{on of}
^the^Eme^r^ge^nc^y^Ec^on^omic^S^t^a^b^iliz^atio^{n Ac}^t^of²⁰⁰⁸^a^nd^{of Gov}^e^rⁿ^m^eⁿ^{t Le}^ndⁱⁿ^{g a}ⁿ^d^Insur^anc^e^F^a^c^ilitie^s^{, U}^.^S.^H^ous^e
^o^f^Rep^r^esen^t^a^tⁱ^v^es,^Co^mmi^t^t^{ee o}ⁿ^Fⁱⁿ^aⁿ^cⁱ^a^l^S^e^rvi^ces,^No^v.¹⁸^,²⁰⁰⁸^,^avai^l^a^b^l^{e at}
^[h^t^t^p^:^/^/^www^.^f^dⁱ^c.^go^v/ⁿ^e^w^s^/ⁿ^e^w^s/^sp^eech^es/^c^h^aⁱ^r^m^aⁿ^/^s^pⁿ^o^v18⁰⁸^.^h^tm^l^]^.
⁴^S^ee,^e.^g^.^{, CRS Re}^p^o^r^{t RL}³⁴³⁷²^,^The^{HOPE NOW}^Alli^anc^e^/^Ame^r^ic^an^Se^c^u^r^itizat^io^{n F}^o^{rum (}^A^{SF) Pl}^{an t}^o^Fre^e^z^e
^C^e^r^t^{ain M}^o^r^t^ga^ge^Iⁿ^te^r^e^s^t^Rate^s^,^by^D^a^vⁱ^{d H}^.^C^a^r^p^eⁿ^te^r^aⁿ^{d E}^d^w^a^r^d^{V. M}^u^r^p^hy^{; Fe}^de^r^a^{l D}^e^pos^{it I}ⁿ^s^u^r^a^nc^e
^Co^rp^oratⁱ^oⁿ^P^r^ess^Rel^ease,^{FDIC Ann}^o^uⁿ^c^e^s^Av^aila^bility^{of I}^ndy^M^a^c^Lo^{an M}^o^dific^ati^{on M}^o^de^l^{, N}^o^v^.^20,²⁰⁰⁸^,
^a^v^a^ila^ble^a^t^[^h^t^t^p:/^/^w^w^w^.^f^dic^.^g^o^v^/^ne^w^s^/ⁿ^e^w^s^/^pr^e^s^s^/²⁰^08/^pr⁰⁸¹^21.^ht^m^l^]^;^Fe^de^r^a^{l H}^ousⁱⁿ^g^Fi^na^nc^e^A^g^eⁿ^cy^P^r^e^s^s
^Rel^ease,^{FHFA Ann}^o^uⁿ^c^e^s^Imple^m^eⁿ^tati^{on P}^l^aⁿ^{s for}^Stre^amli^ne^d^Loaⁿ^M^o^dific^at^io^{n Pro}^g^ram^{, D}^e^c^.¹⁸^{, 2}⁰⁰⁸^,
^a^v^a^ila^ble^a^t^[^h^t^t^p:/^/^w^w^w^.^f^hf^a^.^g^o^v^/^w^e^b^f^ile^s^/^267/SM^Pim^p^lem^e^nta^tion12¹⁸⁰⁸^.p^df^]^.
⁵^S^ee^{CRS Rep}^o^{rt RL}³⁴³⁷²^,^T^h^e^{HOPE NOW}^Allia^nc^e^/^Ame^r^ic^{an S}^e^c^u^ritizatio^{n F}^o^{rum (}^A^{SF) P}^l^aⁿ^t^o^Fre^e^z^e^Ce^rtain
^M^o^r^t^gage^Iⁿ^te^r^e^s^t^Rate^s^,^b^y^Davⁱ^d^{H. Carp}^en^{ter an}^d^Ed^w^a^rd^{V. M}^u^rp^h^y^.

^v^o^lun^t^ar^y^loan^m^odi^fⁱ^catioⁿ^meas^u^r^es^h^a^v^e^f^aⁱ^l^{ed.... B}^ecau^s^e^m^o^s^t^trou^bled^m^o^rtg^a^g^e^s^are
^secu^r^itized^,^m^u^ltip^{le sta}^k^e^h^o^l^d^e^r^s^m^a^y^b^eⁱⁿ^v^o^lv^edⁱⁿ^th^e^d^e^cⁱ^sⁱ^oⁿ^t^o^m^o^dⁱ^f^y^m^o^r^t^g^a^g^e^l^o^aⁿ^s^,
^c^a^u^sⁱⁿ^g^a^c^o^ntⁱⁿ^ue^d^p^a^r^a^l^y^sⁱ^s^.^Al^t^h^o^u^g^h^s^o^m^e^ma^j^o^r^l^e^nd^e^r^s^h^a^v^e^recen^t^l^y^e^m^bar^k^ed^on^loan
^m^odi^fⁱ^catⁱ^oⁿ^s^on^a^wⁱ^{de s}^cal^{e, m}^a^ny^s^e^rvⁱ^cers^an^{d s}^econdary^m^a^r^k^etⁱⁿ^v^e^st^ors^re^m^aⁱⁿ⁶
^uⁿ^w^illiⁿ^g^o^r^uⁿ^ab^{le to}^{act, ev}^eⁿ^w^h^eⁿ^t^h^eir^o^wⁿ^ecoⁿ^o^mⁱ^{c in}^ter^e^{sts d}ⁱ^{ctate o}^t^h^e^r^wⁱ^s^e.
Proponents of amending the Bankruptcy Code believe allowing strip down of primary residences
would have two important results. First, it would encourage the voluntary modification of
mortgages before default or delinquency that may drive borrowers into bankruptcy. Second, they
believe that where voluntary workouts prior to bankruptcy could not be achieved, strip down
would adjust the mortgage terms such that the costs and benefits are efficiently spread among
debtors and creditors, while allowing debtors to remain in the home after bankruptcy. Senator
Durbin, before the Senate Committee on the Judiciary, stated:
^A^s^w^e^h^{eard at}^l^a^s^t^y^ear’s^h^earⁱⁿ^g^,^t^h^{e ben}^e^fⁱ^t^s^of^t^hⁱ^s^propos^al^[t^{o al}^l^o^w^t^h^e^m^odi^fⁱ^catⁱ^oⁿ
^of^certain^m^o^rt^g^a^g^e^debtsⁱⁿ^ban^k^r^u^p^tc^y^]^{are clear. W}^e^h^{eard tes}^tⁱ^m^oⁿ^y^t^h^at:

^M^{y l}^e^gi^sl^a^tⁱ^oⁿ^w^o^ul^d^sⁱ^gⁿⁱ^fⁱ^c^aⁿ^t^l^y^r^e^d^u^c^e^t^h^e^nu^mb^e^r^o^f^fo^r^e^c^l^o^s^ur^e^s^aⁿ^d^he^l^p^h^und^r^e^d^s
^of^t^h^ous^aⁿ^ds^of^f^a^mⁱ^lⁱ^e^s^st^a^yⁱⁿ^t^h^ei^r^h^o^m^e^s^.

^M^o^r^t^g^a^g^e^mo^dⁱ^fi^c^a^tⁱ^o^{n i}ⁿ^b^a^nkr^up^t^c^y^b^e^ne^fi^t^s^e^v^e^r^y^o^ne^{- t}^h^e^ho^me^o^w^ne^r^,^t^h^e^l^e^nd^e^r^,^t^h^e
^neⁱ^g^hb^o^rⁱⁿ^{g ho}^me^o^w^ne^r^s^aⁿ^d^t^h^e^e^c^o^no^my^{- fa}^r^m^o^r^e^t^h^aⁿ^f^o^r^e^c^l^o^s^ur^e^.

^M^y^propos^al^w^o^u^l^{d gi}^v^e^l^eⁿ^d^ers^,^s^e^rvⁱ^cers^aⁿ^{d i}ⁿ^v^e^s^t^ors^{a real}ⁱⁿ^centⁱ^v^{e t}^o^v^o^l^uⁿ^t^ari^l^y⁷
^re^w^o^rk^m^o^rt^g^a^g^e^s^....
Professor Adam Levitin, at the same Senate Judiciary Committee hearing, explained:
^In^{a perf}^ectl^y^fuⁿ^c^tⁱ^onⁱⁿ^g^m^a^r^k^et^wⁱ^th^o^u^{t a}^g^en^c^y^aⁿ^{d trans}^a^ction^cos^t^s^,^len^d^ers^w^o^u^l^{d be}
^en^g^a^g^e^{d i}ⁿ^l^a^rg^e^-^s^c^a^l^e^m^odi^fⁱ^c^a^tⁱ^oⁿ^of^def^a^ul^t^e^{d or di}^s^t^res^s^e^d^m^o^rt^g^a^g^e^l^o^an^s^,^a^s^t^h^e^l^eⁿ^d^e^r^s
^w^o^u^l^{d pref}^{er a s}^m^a^{ller los}^s^f^r^o^m^m^odi^fⁱ^cation^t^h^an^{a larg}^{er los}^s^f^r^o^m^f^o^reclos^u^r^e.^V^o^l^uⁿ^t^a^r^y
^m^o^dⁱ^fi^c^a^tⁱ^o^n,^ho^w^e^ve^r^,^ha^s^no^t^b^e^eⁿ^ha^p^p^eⁿⁱ^ng^oⁿ^a^l^a^r^g^e^-^s^c^a^l^e^,^fo^r^a^va^rⁱ^e^t^{y o}^f^r^e^a^s^oⁿ^s,
^m^o^s^tⁿ^o^tabl^y^con^t^ract^u^a^{l i}^m^p^e^di^m^eⁿ^t^s^,^ag^eⁿ^c^y^cos^t^s^,^{practical i}^m^pedi^m^eⁿ^t^s^,^an^{d oth}^e^r
^tran^s^actioⁿ^cos^t^s^.
^If^al^l^di^s^t^re^s^s^e^d^m^o^rt^g^a^g^e^s^coul^{d be m}^odi^fⁱ^{ed i}ⁿ^baⁿ^k^r^u^p^t^c^y^,ⁱ^t^w^o^u^l^{d prov}ⁱ^d^{e a}^m^e^t^h^{od f}^o^r
^by^pas^sⁱⁿ^g^t^h^{e v}^a^rious^con^t^ract^u^a^{l, ag}^eⁿ^c^y^{, an}^d^oth^e^{r trans}^acti^oⁿ^a^{l in}^e^f^ficien^cⁱ^es^{. P}^e^rm^it^tⁱⁿ^g
^b^a^nkr^up^t^c^y^m^o^dⁱ^fi^c^a^tⁱ^oⁿ^w^o^u^l^d^gi^ve^ho^me^o^w^ne^r^s^t^h^e^o^p^tⁱ^o^{n t}^o^fo^r^c^e^a^w^o^r^k^o^u^t^o^f^t^h^e
^m^o^r^t^g^a^g^e^{, s}^u^b^j^{ect to}^th^{e li}^mⁱ^tatioⁿ^s^p^r^o^v^id^ed^b^y^th^{e B}^aⁿ^k^r^u^p^t^c^y^Co^d^e^{. Mo}^r^e^o^v^er^{, th}^e
^p^o^ssib^ilit^y^o^f^a^b^aⁿ^k^r^u^p^t^c^y^m^o^dⁱ^fⁱ^cat^ioⁿ^w^o^u^l^d^eⁿ^co^u^r^ag^{e v}^o^luⁿ^t^ar^y^m^o^dⁱ^fⁱ^cat^ioⁿ^s^,^as
^m^o^rt^g^a^g^e^leⁿ^d^ers^w^o^u^l^{d pref}^er^{to ex}^ercis^e^m^o^re^con^t^{rol ov}^er^th^{e s}^h^{ape of}^t^h^e^m^odifⁱ^cat^ion^.
^Aⁿⁱⁿ^vo^l^u^nt^a^r^y^p^u^b^lⁱ^c^s^y^st^e^m^o^f^m^o^r^t^ga^{ge m}^odi^fi^catⁱ^oⁿ^w^oul^d^act^u^a^l^l^y^h^e^l^p^f^o^s^t^er^v^o^l^uⁿ^t^ar^y^,
^priv^{ate s}^o^lu^tioⁿ^s^{to t}^h^e^m^o^rtg^a^g^e^cris^is^....
^A^l^l^o^wⁱ^ng^bank^ru^pt^c^y^t^o^s^e^rv^e^as^{a f}^o^rum^f^o^{r di}^s^t^ress^{ed h}^o^m^e^o^wⁿ^e^r^s^t^o^res^t^ru^ct^u^r^{e t}^h^ei^r
^m^o^rt^g^a^g^e^debt^sⁱ^s^bot^h^t^h^e^m^o^st^m^oderat^e^an^{d t}^h^{e best}^m^e^t^h^o^d^f^o^{r res}^o^l^vⁱⁿ^g^t^h^e^f^o^recl^os^u^r^e
^cris^is^an^{d s}^t^abiliziⁿ^g^m^o^rtg^a^{ge m}^a^r^k^ets^.^Uⁿ^li^k^e^any^ot^h^e^{r propos}^ed^res^pon^s^e^{, ban}^k^r^u^p^tc^y

⁶^L^e^tte^r^{to Spe}^a^k^e^r^of^the^H^ous^e^N^a^ncy^P^e^losⁱ^a^{nd H}^ous^e^Mⁱⁿ^o^r^ity^L^e^a^d^e^r^J^{ohn B}^o^e^h^ne^r^,^J^a^n.^6,²⁰⁰⁹^{, a}^v^a^ila^ble^a^t
^[^h^ttp:^//w^w^w^.^m^a^s^s^.^g^o^v^/^C^a^g^o^/doc^s^/^pr^e^s^s^/²⁰⁰⁹^_0^1_⁰⁶^_ba^nk^r^u^ptc^y^_code^_a^tta^c^h^m^e^nt1.p^d^f^]
⁷^S^t^at^em^en^t^o^f^S^eⁿ^a^t^o^{r Ri}^ch^ard^D^u^rbⁱⁿ^,^He^lpi^{ng F}^a^milie^s^Sav^e^th^eⁱ^r^Home^{s: the}^Role^{of B}^ank^ru^ptc^y^L^a^w^{, U}^.^S^.^Se^na^te^,
^Co^mmⁱ^t^t^{ee o}ⁿ^t^h^{e Jud}ⁱ^ci^ary^,^No^v.¹⁹^,²⁰⁰⁸^,^avai^l^a^b^l^{e at}
^[http:^//ju^dicⁱ^a^r^y^.^s^e^na^te^.g^ov^/he^a^r^ing^s^/te^s^tⁱ^m^ony^.cfm^?ⁱ^d=^3598&^w^it_i^d⁼⁷⁴⁷^]^.

^m^odi^fⁱ^cat^ion^off^e^rsⁱ^m^m^e^diate^relief^,^s^o^lv^es^t^h^e^m^a^r^k^{et probl}^e^m^s^{created by}^s^e^c^u^ritizat^ion^,
^addres^s^e^s^bot^h^probl^em^s^of^pay^m^eⁿ^t^res^e^t^s^h^o^c^k^an^dⁿ^e^g^a^tⁱ^v^e^e^q^uⁱ^t^y^,^s^c^r^e^eⁿ^s^o^u^t^s^p^e^c^u^l^a^t^o^rs^,
^s^p^r^e^a^d^s^b^u^r^d^eⁿ^s^b^e^t^w^e^e^{n b}^o^r^r^o^we^r^s^aⁿ^d^l^e^nd^e^r^s^,^aⁿ^d^a^v^oⁱ^d^s^b^o^t^{h t}^h^e^c^o^s^t^s^aⁿ^d^m^o^r^a^l^h^azard⁸
^o^f^a^go^ve^rⁿ^m^e^nt^b^aⁱ^l^o^ut^.
Others argue that amending the Bankruptcy Code alone would not promote voluntary
modifications outside of bankruptcy because such legislation would not directly address the
litigation, tax, accounting, and payment concerns that are the main deterrent to voluntary ⁹
modifications. For instance, a group of Columbia University professors argue that
^[P]r^opos^al^s^t^o^ch^an^g^e^t^h^{e [Bank}^r^u^p^t^c^y^]^C^{ode cou}^l^{d dram}^atⁱ^c^a^l^l^yⁱⁿ^crea^s^e^ban^k^r^u^p^t^c^y^-^fⁱ^lⁱⁿ^g
^{rates. Serv}^icers^w^{ill p}^r^ef^er^m^o^r^t^g^a^g^e^m^o^dⁱ^fⁱ^ca^tioⁿⁱⁿ^b^aⁿ^k^r^u^p^t^c^y^b^ecau^{se t}^h^{eir ex}^p^eⁿ^s^{es are}
^rei^m^bu^rs^{ed i}ⁿ^bank^ru^pt^c^y^{, n}^o^t^ou^t^sⁱ^d^{e i}^t^.^T^h^us^{, propos}^{ed re}^f^o^r^m^{s cou}^l^{d pus}^h^mⁱ^l^lⁱ^oⁿ^s^of
^b^o^r^r^o^w^e^r^sⁱⁿ^to^b^aⁿ^k^r^u^p^tc^y^,^d^e^la^yⁱⁿ^g^t^h^{e r}^e^so^lu^tioⁿ^o^f^t^h^{e c}^u^r^r^eⁿ^t^cr^isis^f^o^r^y^ear^s.
Still others believe allowing modifications of these mortgages in bankruptcy will reduce market
stability. For instance, Professor Mark S. Scarberry, a Resident Scholar at the American
Bankruptcy Institute, believes allowing strip down of primary residence mortgages would “cause
problems in the secondary mortgage market” and would “substantially change the risk ¹⁰
characteristics of home mortgages....” Additionally, David G. Kittle, Chairman of the Mortgage
Bankers Association, has testified:
^On^{e o}^f^th^e^g^r^eate^s^{t p}^o^t^en^tia^l^d^e^stab^ilizin^gⁱⁿ^itia^tiv^e^sⁱ^s^t^h^{e to}^pⁱ^{c o}^f^dⁱ^scu^s^sⁱ^oⁿ^to^d^a^y^-
^a^l^l^o^wⁱⁿ^g^b^a^nkr^up^t^c^y^“c^r^a^m^d^o^w^{n” f}^o^{r h}^o^m^e^m^o^rtg^a^g^e^s^{.... We u}ⁿ^d^ers^t^aⁿ^{d th}^e^w^e^{ll in}^teⁿ^tio^ned
^g^o^{al of s}^u^{ch le}^gⁱ^s^l^at^ionⁱ^s^{to pr}^ov^{ide a back s}^t^{op ag}^aⁱ^ns^{t t}^h^{e l}^a^rg^{e num}^bers^o^f^f^o^reclos^u^r^es^.
^Ho^w^e^v^e^r^,^th^{e u}ⁿⁱⁿ^ten^d^ed^r^e^su^lt^w^o^u^l^d^b^e^lar^g^{e n}^u^m^b^er^{s o}^f^b^aⁿ^k^r^u^p^tcie^{s, h}ⁱ^g^h^e^r^lo^sse^{s to}
^ser^v^icer^{s, len}^d^er^{s an}^dⁱⁿ^v^e^sto^r^{s, an}^d^r^e^d^u^ced^a^b^ilit^y^b^y^th^e^fⁱⁿ^aⁿ^c^{ial in}^d^u^str^y^to^ex^ten^d
^af^f^o^{rdable credit. Su}^ch^ban^k^ru^ptc^y^ref^o^r^m^wⁱ^l^l^h^a^v^e^{a neg}^a^ti^v^eⁱ^m^{pact on}ⁱⁿ^di^vⁱ^du^a^l¹¹
^borrow^e^rs^{, a h}^ousⁱⁿ^g^recov^e^r^y^an^{d th}^{e econ}^o^m^y^as^a^w^hole.
At least three bills that would amend Section 1322 of the U.S. Bankruptcy Code¹² have been ^th
introduced in the 111 Congress. These bills are S. 61 and its House companion, H.R. 200 (the
Helping Families Save Their Homes in Bankruptcy Act of 2009); and H.R. 225 (the Emergency
Home Ownership and Mortgage Equity Protection Act). This report provides an overview of the
general Chapter 13 process and analyzes how the three bills seek to amend Chapter 13. As these
bills, in some cases, deal with matters beyond the scope of this report, the analysis of them is
limited to proposed effects on when the modification of mortgages secured by the debtor’s
primary residence would be allowed; when prepayment penalties on these loans could be waived;
whether and to what extent repayment of these loans would be allowed; whether and to what

⁸^W^r^itte^{n T}^e^sti^m^ony^o^f^A^d^a^m^{J. Le}^v^{itin, A}^ssocⁱ^a^t^e^P^r^of^e^{ssor of}^L^a^w^,^G^e^org^e^to^wⁿ^L^a^w^C^e^nte^r^,^He^lp^{ing Familie}^{s Sav}^e
^t^h^ei^{r Ho}^{mes: t}^h^{e R}^o^l^e^of^B^aⁿ^k^rupt^{cy L}^a^w^{, U}^.^S^.^Se^na^te^,^C^o^m^m^itte^e^{on t}^h^e^J^u^dicⁱ^a^r^y^,^N^o^v^.^19,²⁰^08,^a^v^a^ila^ble^a^t
^http:^//ju^dicⁱ^a^r^y^.^s^e^na^te^.g^ov^/^h^e^a^rⁱⁿ^g^s^/^t^e^s^tim^ony^.cfm^?ⁱ^d=^3598&^w^it_i^d⁼⁷⁵^{42 (}ⁱ^nte^r^na^{l c}^ita^tio^ns^om^itte^d⁾^.
⁹^S^ee,^e.^g^.^{, Ch}^rⁱ^sto^p^h^e^{r May}^e^{r, Ed}^w^a^rd^Mo^rrisoⁿ^,^an^d^T^o^m^a^{sz P}ⁱ^sk^o^r^skⁱ^{, A Ne}^{w Pro}^pos^{al f}^o^{r L}^o^aⁿ^M^odific^at^io^ns^{, J}^a^n.
^{7, 2}⁰⁰⁹^{, a}^v^a^ila^ble^a^t^[http^://w^w^w^4.g^s^b.c^o^l^u^m^b^ia^.e^du/re^a^l^e^s^ta^te^/re^s^e^a^r^c^h^/housⁱⁿ^g^c^risⁱ^s^/^m^o^rtg^a^g^e^m^a^r^k^e^t^]^.
¹⁰^S^t^at^em^en^t^o^f^M^a^{rk S}^.^S^carb^e^rr^y^,^P^r^o^f^esso^{r o}^f^L^a^w^an^d^Rob^e^rt^M^.^Zⁱⁿ^m^an^Resi^d^eⁿ^t^S^c^ho^l^a^{r at}^t^h^{e Ameri}^can
^Ba^nk^ruptc^y^Institute^,^T^h^e^L^oomin^{g Fore}^c^l^os^ure^{Crisis: How T}^o^He^{lp F}^a^milie^{s S}^a^v^e^Theⁱ^{r Home}^s^{, U}^.^{S. Se}^na^te^,
^Co^mmⁱ^t^t^{ee o}ⁿ^t^h^{e Jud}ⁱ^ci^ary^,^Dec.⁵^,²⁰⁰⁷^.
¹¹^Sta^t^e^m^eⁿ^{t of}^Da^vⁱ^{d G}^.^Kittle^{, Ch}^aⁱ^rm^aⁿ^of^the^Mortg^a^g^e^Ba^nk^e^r^{s A}^s^socⁱ^a^tion,^He^l^pⁱⁿ^{g F}^a^milie^{s S}^a^v^e^theⁱ^{r Home}^s:
^the^Role^{of Bank}^r^uptc^y^L^a^w^,^U.^S^.^S^eⁿ^a^t^e^,^Co^m^mⁱ^t^t^{ee o}ⁿ^t^h^{e Ju}^di^ci^ar^y^,^No^v.¹⁹^,²⁰⁰⁸^,^avai^l^a^b^l^{e at}
^[http:^//ju^dicⁱ^a^r^y^.^s^e^na^te^.g^ov^/he^a^r^ing^s^/te^s^tⁱ^m^ony^.cfm^?ⁱ^d=^3598&^w^it_i^d⁼⁷⁵⁴¹^]^.
¹²^{11 U}^.^S.C^.^§¹⁰^1,^et^seq^.

degree interest rates and annual percentage rates (APRs) on these loans could be modified; and
whether and in what circumstances the credit counseling requirement could be waived or
otherwise adjusted.

Bankruptcy provides an avenue by which debtors may get relief from their debts. Chapter 13
governs reorganizations for most individuals. A reorganization generally means that debts are
paid from the debtors’ future income. Outside of bankruptcy, debtors and creditors may attempt to
consensually modify the terms of their contractual obligations. If the parties attempt to reach a
voluntary workout outside of bankruptcy, the Chapter 13 framework may serve as a baseline for
negotiations with the parties understanding that if they cannot agree, the terms may be modified ¹³
in accordance with the parameters of the Code if the debtor files and qualifies for bankruptcy.
When a qualified debtor cannot meet outstanding obligations or negotiate revised payments with ¹⁴
his or her creditors, the debtor may file a petition for an individual reorganization. In most ¹⁵
cases, debtors must receive credit counseling before filing a Chapter 13 petition. Under Chapter ¹⁶

13, the debtor is required to file a proposed reorganization plan with the court. The proposed ¹⁷

Chapter 13 plan generally is submitted at the same time as the petition for bankruptcy. Section
1322(a) states the requirements for all plans. Section 1322(b) states additional parameters that a
plan may meet, if applicable. If the plan meets the Code’s requirements, including the guidelines

¹³^Forⁱⁿ^s^t^aⁿ^c^e^,^{11 U}^.^S.C^.^§¹⁰⁹⁽^e⁾^r^e^quir^e^s^a^C^h^a^p^te^r¹³^pe^tit^io^ne^r^t^o^ha^v^e^a^r^e^g^u^la^r^inc^o^m^e^a^{nd lim}^ite^{d a}^m^{ount of}
^s^e^c^u^r^e^d^a^{nd uns}^e^c^u^r^e^{d de}^bt.
¹⁴^V^o^lu^nta^r^y^m^o^r^t^g^a^g^e^m^odifⁱ^c^a^tions^w^e^r^e^r^e^la^ti^v^e^l^y^r^a^r^e^pr^ior^to²⁰^08.^Se^e^S^t^at^em^en^t^o^f^Hen^r^y^J.^S^o^mmer,^P^r^esi^d^en^t
^of^the^N^a^tiona^{l A}^s^s^o^cⁱ^a^tion^of^C^o^ns^um^e^r^B^a^nk^r^uptc^y^A^ttorⁿ^ey^s^,^The^Loomⁱ^ng^For^e^c^l^os^ur^e^C^r^is^is^:^H^o^w^To^H^e^lp
^Familie^{s S}^a^v^e^Theⁱ^{r Home}^s^{, U.}^S.^Se^na^te^{, Com}^m^itte^e^{on the}^J^udicⁱ^a^r^y^,^De^c^.^{5, 2}⁰⁰⁷^{. (“}^If^c^r^a^m^dow^{n is not}^pe^rm^itte^{d f}^o^r
^de^btor^s^w^h^o^c^a^nno^{t pa}^y^theⁱ^r^m^o^r^t^g^a^g^e^s^,^de^btor^s^a^{nd c}^r^e^dⁱ^t^or^s^ha^v^e^s^e^v^e^r^a^{l othe}^r^a^lte^rⁿ^a^tiv^e^s^{, no}^ne^o^f^w^h^ic^{h is}^m^o^r^e
^f^a^v^o^ra^ble^{to t}^h^e^m^o^rtg^a^ge^c^r^e^d^{itor: ... (}⁴⁾^V^o^lu^nta^r^y^m^odifⁱ^c^a^tion,^wh^ich^lend^{ers ra}^{rely a}^g^r^{ee t}^o^{, i}ⁿ^w^h^ic^{h a}ⁿ
^a^r^r^a^ng^em^eⁿ^{t s}ⁱ^m^ila^r^{to c}^r^am^dow^{n r}^e^s^u^lts^.”⁾⁽^e^m^pha^sⁱ^s^a^dde^d)⁽^“^B^u^t^the^tr^uth^is^tha^t^v^o^l^uⁿ^ta^r^y^m^odifⁱ^c^a^tions^a^r^e^no^t
^be^ing^m^a^de^{in a}ⁿ^y^sⁱ^gⁿⁱ^f^ic^aⁿ^{t nu}^m^b^e^r^s^{... In a}^dra^m^a^tic^e^x^am^ple^,^{it w}^a^s^rec^eⁿ^tl^y^re^porte^{d t}^h^a^t^w^h^eⁿ^s^t^a^t^e^housⁱⁿ^g
^fⁱⁿ^aⁿ^{ce ag}^en^ci^{es so}^u^g^h^t^t^o^h^e^l^p^bo^rro^w^e^{rs b}^y^a^s^kiⁿ^g^l^eⁿ^d^e^{rs t}^o^m^o^dⁱ^fy^l^o^an^{s so}^t^h^{e agen}^ci^{es co}^u^l^d^t^h^en^refⁱⁿ^aⁿ^{ce t}^h^em^,
^th^ey^h^a^dⁿ^o^s^u^{ccess b}^ecau^{se len}^d^e^{rs w}^o^u^l^dⁿ^o^{t m}^a^k^e^th^e^m^o^dⁱ^fⁱ^cat^ioⁿ^s^{. If}^m^o^rtg^a^g^e^co^m^p^an^ies^w^{ill n}^o^t^m^o^dⁱ^f^y^lo^an^s
^ev^en^w^h^en^th^ey^w^{ill receiv}^e^an^immedⁱ^{ate p}^a^y^o^ff^th^ro^u^g^h^refⁱⁿ^aⁿ^cⁱⁿ^g^,^th^ey^certain^l^y^w^{ill n}^o^t^m^o^dⁱ^fy^th^e^mⁱⁿ^cases
^w^h^e^r^e^the^y^w^{ill be}^pa^id^ov^e^r^a^lon^g^pe^riod^of^tim^e^.^”⁾^.
^H^o^w^e^v^e^r^,^v^o^lunta^r^y^m^odifⁱ^c^a^tions^a^r^e^be^c^o^mⁱ^ng^m^o^r^e^a^{nd m}^o^r^e^c^o^m^m^{on a}^s^the^housⁱⁿ^g^m^a^r^k^e^t^ha^s^c^onti^nue^d^to^la^g
^a^{nd m}^a^r^k^e^t^pa^r^tic^ipaⁿ^ts^ha^v^e^de^vⁱ^s^e^{d w}^a^y^s^{to pe}^r^f^or^m^m^odifⁱ^ca^tion^s^.^S^ee,^e.^g^.^{, C}^R^S^R^e^por^t^R^L³⁴³⁷²^,^T^h^{e HOPE}^NOW
^Allia^nc^e^/^Ame^r^ic^{an Se}^c^u^ritⁱ^zati^on^{Forum (}^A^{SF) P}^l^aⁿ^to^Fre^e^z^e^Ce^{rtain M}^o^rt^ga^ge^In^te^re^{st Rate}^s^{, by}^D^a^vⁱ^{d H}^.^C^a^r^p^eⁿ^te^r
^a^{nd E}^d^w^a^r^d^V.^Mur^phy^{; Fe}^de^r^a^{l D}^e^pos^{it I}ⁿ^s^u^r^a^nc^e^C^o^r^por^a^tⁱ^on^Pr^e^s^s^R^e^le^a^s^e^,^{FDIC Ann}^o^uⁿ^c^e^s^Av^aila^bility^of
^I^ndy^M^a^c^Lo^an^M^odi^fic^ati^{on M}^o^d^e^l^{, Nov}^.²⁰^,²⁰^08,^a^v^a^ila^ble^a^t^[ht^t^p://w^ww^.^f^dic^.^g^o^v^/^ne^w^s^/ⁿ^e^w^s/^pre^ss/200^8/
^pr⁰⁸¹^21.^htm^l^]^;^Fe^de^r^a^{l H}^ousⁱⁿ^g^Fina^nc^e^A^g^eⁿ^cy^P^r^e^s^s^R^e^le^a^s^e^,^FH^{FA An}^no^unc^e^s^I^m^ple^m^eⁿ^t^a^tioⁿ^Plans^for
^Str^e^am^line^d^L^o^aⁿ^M^odi^fic^ati^oⁿ^P^r^ogr^am^,^Dec.¹⁸^,²⁰⁰⁸^,^avai^l^a^b^l^e^at
^[^h^ttp:^//w^w^w^.f^h^f^a^.^g^o^v^/^w^e^bf^ile^s^/^267/SM^Pim^p^lem^e^nta^tion1²¹⁸⁰^8.^pdf^]^.
¹⁵^T^h^{is re}^quire^m^e^{nt c}^aⁿ^de^la^y^ba^nkruptc^y^f^iling^s^{. Suc}^h^a^de^la^y^m^a^y^be^de^trim^eⁿ^ta^{l to}^de^{btors se}^e^k^ing^{to sa}^v^e^theⁱ^r
^hom^e^s^f^r^om^f^o^r^e^c^l^os^ur^e^thr^oug^h^a^C^h^a^p^te^r^{13 r}^e^or^g^a^niz^a^tion.
¹⁶^{11 U}^.^S.C^.^§¹³²¹^.
¹⁷^Ba^nk^ruptc^y^Rule¹⁰^07(c⁾^a^l^l^o^w^s^the^de^bt^{or t}^o^f^ile^a^re^org^a^niz^a^tion^plaⁿ^w^ithin¹⁵^da^y^s^of^pe^tition^.

of Section 1322, the court may confirm the plan in accordance with Section 1325.¹⁸ Chapter 13 ¹⁹
plan disputes among debtors and creditors are settled by the bankruptcy judge.
The Code provides courts some leeway to adjust the value of certain debts. For many secured
debts, the court has “strip down” – also, commonly referred to as “cram down” – authority. Strip
down is the power to lower, over the creditor’s objections, the amount the debtor must pay the
creditor for the secured claim to as low as the collateral’s fair market value. Amounts in excess of ²⁰
fair market value are treated as unsecured debt and may be discharged.
Among the secured debts that the court may not strip down under the current Chapter 13 are those ²¹
that are secured by the debtor’s principal residence. Section 1322(b)(2) states in relevant part,
“the plan may ... modify the rights of holders of secured claims, other than a claim secured only
by a security interest in real property that is the debtor’s primary residence.”
Other real property liens, however, are commonly modified in bankruptcy reorganizations. As a
general rule, a real property lien is only protected as a nondischargeable secured debt up to the
market value of the collateral. Indebtedness under a mortgage or security interest is treated as
unsecured – and therefore modifiable or potentially dischargeable to the extent that the amount of ²²
indebtedness exceeds the value of the collateral. The Code allows a court to modify a mortgage ²³
secured by the debtor’s vacation home, investment home, and family farm, for instance, but by ²⁴
virtue of § 1322(b)(2) – and a parallel provision in Chapter 11 – a court may not strip down the
claim on a mortgage secured by the same individual’s primary residence. Even after this
provision was enacted by the Bankruptcy Reform Act of 1978, some courts interpreted the Code
as allowing strip down of primary residences until they were overruled by a 1992 U.S. Supreme ²⁵
Court decision. Hence, the Code’s prohibition on the modification of liens that secure a primary
residence is arguably the exception, not the rule.
The purpose of the exception, at least based on analysis of its legislative history as expressed in a
concurring Supreme Court opinion by Justice Stevens, was to “encourage the flow of capital into ²⁶
the home lending market.”

¹⁸^{11 U}^.^S.C^.^§¹³²⁵^pr^ov^ide^s^the^s^t^a^nda^r^d^s^by^w^h^ic^{h a}^ba^nk^r^u^p^t^c^y^cour^{t m}^a^y^c^onf^ir^m^a^r^e^or^g^a^niz^a^{tion pla}ⁿ^.
¹⁹¹¹^U^.^S^.^C^.^§§⁵⁰^{2 an}^{d 13}²⁵^.
²⁰^{11 U}^.^S.C.^§^§¹³²²^(b)(^{2). T}^o^de^te^rm^ine^the^f^a^ir^m^a^rk^e^t^va^lue^of^a^c^o^lla^te^ra^{l f}^o^{r the}^p^u^rp^ose^of^e^x^e^r^cⁱ^sing^{its strip}
^dow^{n a}^u^th^or^ity^{, the}^c^o^ur^{t g}^e^ne^r^a^lly^holds^a^he^a^r^ing^d^u^rⁱ^ng^w^h^ic^{h t}^h^e^pa^rtie^{s subm}^{it e}^v^ideⁿ^c^e^{to su}^pp^{ort a}^v^a^lue^.^A^f^te^r
^this^he^a^r^ing^,^the^c^o^ur^t^de^te^r^m^ine^s^the^a^ppr^opr^ia^te^f^a^ir^m^a^r^k^e^t^v^a^lue^,^a^{nd t}^h^a^t^a^m^{ount is}^us^e^d^t^o^s^e^{t the}^r^e^duc^e^d^de^bt
^v^a^lue^,^w^h^ic^{h is}^plug^g^e^{d in}^to^the^d^e^btor^’^s^r^e^or^g^a^niz^a^tioⁿ^plaⁿ^.
²¹^{11 U}^.^S.C^.^§¹³²²⁽^b)⁽²⁾^.^Aⁿ^e^x^c^e^ptio^{n t}^o^t^h^is^r^u^le^is^pr^ov^ide^d^f^o^r^p^r^im^a^r^y^r^e^sⁱ^de^nc^e^m^o^r^t^g^a^g^e^s^{in w}^h^ic^{h the}^fⁱ^na^l
^pa^y^m^eⁿ^{t unde}^r^the^or^ig^ina^l^te^r^m^s^w^{ould be}^due^durⁱⁿ^g^the^r^e^or^g^aⁿⁱ^z^a^{tion p}^l^aⁿ^.¹¹^U^.^S.C^.^§¹³²²⁽^c⁾⁽²⁾^;^see^In^re^th
^P^a^s^c^he^n,²^{96 F.3}^d¹²⁰³⁽¹¹^Cⁱ^r^.²⁰⁰²⁾^{. W}^h^ile^m^odifⁱ^c^a^{tion g}^e^ne^r^a^lly^is^{not a}^llow^e^{d, a}^de^bt^or^m^a^y^be^a^b^le^to^c^u^r^e
^de^f^a^ults^a^{nd ot}^he^r^w^is^e^r^e^ins^t^a^t^e^the^te^r^m^s^of^a^de^{bt s}^e^c^u^r^e^{d by}^the^de^btor^’^s^pr^im^a^r^y^r^e^sⁱ^de^nc^e^pur^s^u^aⁿ^{t t}^o¹¹^U^.^S^.^C^.^§^th
¹³²²⁽^b)⁽⁵⁾^.^S^ee^{8 C}^o^llie^r^on^Ba^nk^{r., (1}⁵^Ed.²⁰⁰⁸⁾^{, p}^.¹³²²^.^09.
²²^{11 U}^.^S.C^.^§⁵⁰^6.
²³^{11 U}^.^S.C^.^§¹²²²⁽^b)⁽²⁾^.
²⁴^{11 U}^.^S.C^.^§¹¹²³⁽^b)⁽⁵⁾^.^Iⁿ^divⁱ^d^u^a^ls^w^{ho do}^not^q^u^a^lif^y^f^o^r^C^h^a^p^te^r¹³^m^a^y^be^a^b^le^{to f}^ile^f^o^r^a^r^e^or^g^a^niz^a^{tion i}ⁿ
^C^h^a^p^te^r¹¹ⁱⁿ^s^pⁱ^t^e^of^the^f^a^c^t^tha^t^C^h^a^p^te^r^{11 is}^g^e^ne^r^a^ll^y^f^o^r^c^o^m^m^e^r^c^ia^{l de}^btor^s^.^{11 U}^.^S.C^.^§¹⁰^9;^{see a}^l^so^,^T^oⁱ^{bb v}^.
^Ra^dlof^f^,^{501 U}^.^S^.¹⁵⁷⁽¹⁹⁹^{1). A}^Cha^p^te^{r 1}³^pe^titio^ne^{r, f}^o^{r i}ⁿ^s^t^aⁿ^c^e^,^m^u^s^t^ha^v^e^s^e^c^u^re^{d a}^nd^uns^e^c^u^r^e^{d de}^bts^tha^t^f^a^ll
^be^low^c^e^r^ta^{in thr}^e^s^h^o^l^ds^.¹¹^U^.^S.^C^.^§¹⁰⁹⁽^e⁾^.
²⁵^N^obe^lm^aⁿ^v^.^A^m^{. Sa}^v^.^B^a^nk^{, 508 U}^.^S.³^{24 (}¹⁹⁹²⁾^.
²⁶^Id^{. a}^t³³^{2 (}^c^iti^ng^G^r^ubbs^v^.^H^o^us^ton^Fir^s^{t A}^m^{. Sa}^v^.^A^s^s^’^{n., 730}^F.^2d²³^6,²⁴^5-⁴⁶⁽⁵^th^Cir.¹⁹⁸⁴^).^D^e^sp^{ite Ju}^stice
⁽^c^onti^nue^d.^..)

S. 61 and its House companion H.R. 200 (the Helping Families Save Their Homes in Bankruptcy
Act of 2009), as introduced, would allow for certain modifications of debts secured by the
debtor’s primary residence “that is the subject of a notice that a foreclosure may be commenced.”
The foreclosure process varies by state. In some states, the process can start and finish in a matter
of days. Requiring a foreclosure notice before a debtor may take advantage of the strip down in
bankruptcy may limit the law’s effectiveness because it could force a debtor to file a bankruptcy
petition within a short period of time. Making the decision to file for bankruptcy may be difficult
to do quickly because potential debtors may desire to compare bankruptcy to other options based
on the effect a reorganization is likely to have on their ability to retain certain property, their
credit worthiness, their future income, etc. Potential debtors may need to discuss their situation
with a bankruptcy attorney in order to make a knowledgeable decision.
News sources indicate that changes to these two bills are imminent. The specifics of the changes
are not yet available. But according to these sources, the bills may be amended to limit mortgage
modifications in bankruptcy only to loans entered into prior to the bills enactment. In addition,
debtors would have to certify that they sought contact with their lender/servicer to attempt a loan ²⁷
modification prior to filing a petition for bankruptcy in order to benefit from the change in law.
The remainder of the analysis in this report is based on the bills as introduced. The report will be
updated as new details become available.
If a qualified debtor’s mortgage meets the above requirements, then the debtor’s Chapter 13
reorganization plan may modify the terms of the mortgage debt in several different ways. First,
the secured claim may be stripped down to the fair market value of the property, and the ²⁸
remaining balance would be treated as an unsecured claim.

^(...c^on^tin^ue^d)
^S^t^even^{s’s st}^at^e^m^en^t^,ⁱ^tⁱ^s^un^cl^{ear w}^h^et^h^e^{r en}^co^u^r^agiⁿ^{g cap}ⁱ^t^a^lⁱⁿ^t^o^t^h^{e m}^o^rt^gag^e^l^eⁿ^dⁱⁿ^g^m^a^rk^et^was^t^h^{e on}^l^y^,^o^r^even
^pr^im^a^r^y^,^legⁱ^s^l^a^tiv^e^pur^pos^e^of¹¹^U^.^S.C^.^§¹³²²⁽^b)⁽²⁾^.^T^h^e^la^ng^ua^g^e^of^{§ 132}²⁽^b)⁽²⁾^w^a^s^the^r^e^s^u^lt^of^a^c^o^m^p^r^o^mⁱ^s^e
^be^tw^e^eⁿ^the^H^ous^e^aⁿ^d^Se^na^te^v^e^r^s^ions^of^the^B^a^nk^r^uptc^y^R^e^f^o^r^m^A^c^{t o}^f¹⁹⁷^{8 (}^P^.L^{. 95-}⁵⁹⁸⁾^{. H}^o^w^e^v^e^r^,^the^r^e^w^a^s^no
^c^onf^e^r^eⁿ^c^e^re^{port f}^o^{r this}^bill,^aⁿ^{d CRS re}^se^a^r^c^h^of^the^re^c^o^rde^d^le^gⁱ^sla^tiv^e^history^of^{§ 132}^2(b)(²^{) y}ⁱ^e^l^de^{d lit}^tle^to
^e^x^plaⁱ^{n the}^pur^pos^e^be^hin^d^t^h^e^e^x^c^e^p^{tion f}^o^r^de^bts^s^e^c^u^r^e^d^by^the^d^e^btor^’^s^pr^im^a^r^y^r^e^sⁱ^de^nc^e^.^G^r^ubb^s^’^s^c^onc^lusⁱ^oⁿ^,
^w^h^ic^{h w}^a^s^r^e^lie^{d up}^on^by^J^u^s^tic^e^Ste^v^eⁿ^s^,^a^ppe^a^r^e^d^to^be^ba^s^e^{d o}ⁿ^w^itne^s^s^te^s^tⁱ^m^on^y^dur^ing^he^a^r^ing^s^{on t}^h^e^a^c^t^{, w}^h^ic^h^th^th
^w^e^r^e^c^onduc^te^dⁱⁿ^the⁹⁴^a^nd⁹⁵^C^ong^r^e^s^s^e^s^.^Som^e^of^the^m^o^r^e^r^e^le^v^a^{nt te}^s^tⁱ^m^ony^c^ite^d^w^a^s^gⁱ^v^e^{n by}^Edw^a^r^d^J^.^th
^Kulik^dur^ing^the^he^a^r^ing^s^f^r^om^the⁹⁵^Cong^re^{ss. Mr. K}^u^lik^{, re}^pre^s^eⁿ^ting^the^Re^a^l^Esta^te^Divⁱ^sioⁿ^of^the
^Ma^s^s^a^c^hus^e^tts^Mutua^l^Lⁱ^f^e^Iⁿ^s^u^r^a^nc^e^C^o^m^p^aⁿ^y^,^e^x^pr^e^s^s^e^{d c}^onc^e^r^{n a}^bout^pr^ov^is^ions^of^the^bi^lls^tha^t^w^{ould a}^llow
^m^odifⁱ^ca^{tion of}^s^e^c^u^r^e^{d de}^bts^.^H^e^s^t^a^t^e^d^“^[^t^]^he^s^e^pr^ov^isⁱ^ons^m^a^y^c^a^us^e^r^e^sⁱ^de^ntia^{l m}^o^r^t^g^a^g^e^le^nde^r^s^{to be}
^ext^r^ao^rdⁱⁿ^ari^l^y^cau^tⁱ^o^u^sⁱⁿ^m^a^kiⁿ^g^l^o^an^{s i}ⁿ^cases^w^h^{ere t}^h^{e gen}^e^ral^fⁱⁿ^aⁿ^cⁱ^a^l^reso^u^r^{ces o}^f^t^h^{e i}ⁿ^dⁱ^vi^du^al^bo^rro^w^e^{r are}
^not^pa^rtic^ula^r^ly^strong^.”^{Mr. K}^u^li^k^c^ontin^ue^{d: “}^[^s^]^e^r^io^{us c}^o^nside^r^a^t^{ion s}^h^o^u^ld^be^gⁱ^v^e^{n to}^m^odify^ing^bot^{h b}^{ills so}^tha^t^,
^a^t^the^le^a^s^{t ...}^a^m^o^rtg^a^ge^{on re}^a^l^pro^p^e^r^ty^othe^{r tha}ⁿ^inv^e^s^t^m^e^{nt prope}^rty^m^a^y^{not be}^m^odifⁱ^e^d^{.... ”}^See^Bank^r^u^p^t^c^y
^R^e^f^o^{rm A}^c^t^o^f¹⁹⁷⁸^:^Hea^rⁱⁿ^g^s^on^S^.²²⁶⁶^an^{d H.}^R^.⁸²⁰⁰^{, U}^.^S^.^Se^na^t^e^{, Subc}^om^m^itte^e^of^I^m^pr^ov^em^eⁿ^ts^{in J}^u^dicⁱ^a^l^th^st
^Ma^c^h^ine^r^y^of^the^Com^m^itte^e^{on t}^h^e^Judicⁱ^a^r^y^,⁹⁵^Cong^.,¹^Se^s^s^.^,⁷⁰^7,⁷¹^4-¹⁵⁽¹⁹⁷⁷⁾^.
²⁷^S^ee,^e.^g^.^{, Na}^tio^na^l^Public^Ra^dio,^Citigro^up^Antⁱ^-Fore^c^l^osur^e^P^l^aⁿ^W^{ould Alte}^r^Lo^ans^,^J^a^{n. 8, 20}⁰⁹^{, a}^v^a^ila^ble^a^t
^[^h^ttp:^//w^w^w^.npr^.or^g^/^t^e^m^pla^t^e^s^/^s^tor^y^/^s^tor^y^.php?^s^t^or^y^I^d=⁹⁹¹³²³³⁴^]^.
²⁸^S.⁶¹^§^{4 a}ⁿ^d^H.R.²⁰⁰^{§ 4.}^T^h^e^hol^de^{r of}^the^c^l^aⁱ^m^tha^t^is^m^odifⁱ^e^d^p^u^rsua^nt^to^§⁴^of^the^s^e^{bills w}^{ould c}^onti^nue^to
^ha^v^e^a^lie^{n on}^the^pro^p^e^r^ty^{until t}^h^e^se^c^u^re^{d c}^l^aⁱ^m^{is f}^u^ll^y^pa^{id un}^d^e^{r the}^plaⁿ^or^un^{til t}^h^e^c^l^aⁱ^m^{is disc}^ha^rg^e^dⁱⁿ
^acco^rd^an^{ce w}ⁱ^t^h¹¹^U.^S^.^C.^§¹³²⁸^,^w^hⁱ^c^h^e^{ver co}^{mes l}^a^t^e^r.^S^.⁶¹^§⁶^an^{d H.}^R.²⁰⁰^{§ 6}^.

Second, the plan may prohibit, reduce, or delay changes in variable interest rates.²⁹ This provision
would address, in part, mortgages that started with relatively low fixed rates, but subsequently
adjusted to a significantly higher variable rate. These low, initial rates are often referred to as
teaser rates. Borrowers who could meet the payments at the introductory rate may not be able to
afford the higher, adjusted rate.
Third, the plan may allow for payment of the qualifying mortgage debt for 40 years less the
number of years the loan has been outstanding or for the remaining payment term, whichever is ³⁰
longer. This provision would not adjust the payment of other debts beyond the normal three- to
five-year term of repayment plans. In other words, the bills would allow for repayment of
modified primary residence debts over 40 or more years, but the repayment period of all other
debts would not be changed by the bills. Requiring debtors to pay off a potentially large debt, like
a primary residence mortgage, in five years or less could be prohibitively difficult and could
undermine the effectiveness of the law. This provision of S. 61 and H.R. 200 is important because
most courts interpret the current Code as requiring debtors to pay off the entire secured claim of
non-primary residence mortgages that are modified in accordance with § 1322(b)(2) during the ³¹
three- to five-year plan.
Fourth, plans may provide a fixed interest rate based on the prevailing rate as published by the ³²
Board of Governors for the Federal Reserve System, plus a reasonable yield for risk. This
provision would allow the reduction of fixed interest rates to levels consistent with current market
conditions for comparable mortgages.
Fifth, plans may waive prepayment penalties that are provided for in the loan document.³³
Prepayment penalties are intended to cover the mortgage holder for lost interest payments
incurred due to early payment. These fees were especially common in subprime mortgages.
Finally, the bill would allow for the elimination of the Code’s credit counseling requirement if the
debtor certifies to a court that a foreclosure sale has been scheduled on the debtor’s principal ³⁴
residence. This waiver would remove a procedural hurdle that could slow the debtor’s ability to
file a bankruptcy petition, which may be important in light of the streamlined foreclosure process,
as discussed above.

²⁹^{S. 61 § 4}^aⁿ^d^H^.^R^.²⁰^{0 §}^4.
³⁰^{S. 61 § 4}^aⁿ^d^H^.^R^.²⁰^{0 §}^4.
³¹^Se^e^,^e.^g^.^{, In}^re^Ene^w^a^l^l^y^{, 368}^F.³^d¹¹⁶⁵^,¹¹^{72 (}⁹^th^Cⁱ^r^.²⁰⁰⁴⁾⁽^“^T^h^e^r^ef^or^e^,^a^de^bt^or^m^a^y^{not us}^e^§⁵⁰⁶⁽^a⁾ⁱⁿ
^c^o^m^b^ina^{tion w}^ith^{§ 1}³²²⁽^b⁾⁽⁵⁾^t^o^r^e^duc^e^the^s^e^c^u^r^e^{d c}^l^aⁱ^m^a^{nd r}^e^pa^y^{it ov}^e^r^a^pe^rⁱ^{od l}^ong^e^r^thaⁿ^the^plaⁿ^te^r^m^.”⁾^;^Iⁿ^r^e
^Kⁱ^nne^y^,^L^E^XI^{S 22}³¹^3,¹⁸⁽^C^o^nn.²⁰⁰⁰⁾⁽^“^I^f^the^[^m^or^tg^a^g^e^]^pa^y^m^ents^a^r^e^c^h^aⁿ^g^e^{d, s}^e^c^tio^ns¹³²²⁽^c⁾^a^{nd 1}³²⁵⁽^a⁾⁽⁵⁾
^bot^{h r}^e^q^u^ir^e^tha^t^the^y^be^c^o^m^p^le^te^{d ov}^e^r^the^lif^e^of^the^plaⁿ^{, w}^h^ic^h^c^a^nnot^e^x^ceed^fⁱ^v^e^y^{ears.... ” (}^qu^otin^g^In^r^e
^Ma^c^G^r^e^g^o^{r, 172}^B.R.⁷¹^8,⁷²^{1 (}^M^a^s^s^.¹⁹^{94) (}ⁱ^nte^r^na^l^c^ita^tio^ns^o^m^itte^{d)); In re}^P^r^ue^tt^{, 1}⁷⁸^B.R.⁷^(N^.D^.A^la^{. 1995)}^{; In}
^r^e^B^r^ow^{n, 17}^{5 B}^.^R^.¹^{29 (}^M^a^s^s^.¹⁹⁹⁴⁾^;^Iⁿ^r^e^Mur^phy^{, 17}^{5 B}^.^R^.¹³⁴⁽^M^a^s^s^.¹⁹⁹⁴⁾^{. T}^h^e^r^e^is^s^o^m^e^dis^a^g^r^e^e^m^e^{nt a}^m^ong
^the^c^our^{ts a}^s^{to w}^h^a^t^a^d^j^u^stm^e^{nts to m}^o^rtg^a^g^e^te^r^m^{s c}^onstitute^a^“^m^odifⁱ^c^a^tion”^pursuaⁿ^{t t}^o^§¹³²²^(b^)(2).^C^o^m^par^e^In
^r^e^K^ope^r^,²⁸^{4 B}^.^R^.⁷⁴^7,⁷⁵^{2 (}^C^on^{n. 2}⁰⁰²⁾^w^{ith I}ⁿ^r^e^P^r^ue^tt,¹⁷^{8 B}^.^R^.^a^t^9.
³²^{S. 61 § 4}^aⁿ^d^H^.^R^.²⁰^{0 §}^4.
³³^{S. 61 § 5}^aⁿ^d^H^.^R^.²⁰^{0 §}^5.
³⁴^{S. 61 § 2}^aⁿ^d^H^.^R^.²⁰^{0 §}^2.

H.R. 225 (the Emergency Homeownership and Equity Protection Act), as introduced, is identical
to S. 61 and H.R. 200 as they were introduced with regards to the terms discussed in this report,
except that modifications could only be made to qualifying debts that were entered into prior to ³⁵
the bill’s enactment date.
^Davⁱ^d^{H. C}^a^rp^en^ter
^L^e^gⁱ^s^l^at^iv^{e A}^t^torn^e^y
^dcarpen^t^er@^c^rs^.l^oc.g^ov^{, 7-}⁹¹¹⁸

³⁵^H.^R^.²²^{5 §}³^.