I’ve been thinking of ways to make the new Chapter 13 process work.  It seems like with the economic pinch the powers that be have determined to make Chapter 13 more difficult.

The first thing that jumps out is that we can no longer extend plans beyond 60 months.  Judges used to be given discretion to allow a 66 month or even longer length of plan, now we are stuck with 60, leaving bankruptcy attorneys to decide whether or not they want to do a balloon payment or do a step-up plan that they know their client can’t handle unless some financial miracle comes their way… in this economy the miracle man hasn’t been around often.

I think I have a solution, but it will require Republicans or Democrats (hereinafter referred to as Republicrats) to set aside their animus and ignore lobbyists from mortgage lenders.

The solution is to create a new Chapter in bankruptcy.  I vote for Chapter 15, but I don’t really care what it is called.

This would be a supervised repayment plan like Chapter 13 is, but instead of repaying it over 5 years, the past-due amount on the mortgage would be put on the end of the mortgage.

The mortgage would be reset to 31% of the debtor’s take home pay for five years, and the difference in the mortgage would be put to the end of the mortgage as well.

Take this example:

Joe & Susie Homebuyer have a mortgage at $1200 per month.  After being laid off for a year, Joe’s income dropped to $3000 from $5o00 (FYI I know women work too, but for mathematical purposes, assume Susie does not work outside the home).

Joe is now 10 months behind on his mortgage, which is $12,000.  He is looking at a sheriff sale and instead chooses to file Chapter 15 bankruptcy.  31% of Joe’s income is $930 per month.  The difference between $930 and $1200 over 60 months is $16,200.  (The reason I suggest 5 years is because this recession should be over in 5 years or less…hopefully).

The total amount of $28,200 gains interest at the rate the Federal Reserve Lends on a short term basis + 1% at the time of the case being filed (that is the rate mortgage lenders can borrow money from the Federal Reserve at).

Right now, that rate would be 1.25%, and over the course of 30 years the interest would be $5630 (rounded off from $5631.64).

That would put an endcap of $33830 on the end of the mortgage.  That endcap would also gain interest at the standard interest rate of the original mortgage.  Joe & Susie would pay $1217 per month for the remaining 30 months and then the mortgage would be paid off.

If Joe & Susie decide to move, they can sell their property and catch up the mortgage and the endcap interest.  If Joe & Susie still default and wind up getting foreclosed on, the endcap debt CANNOT be discharged in a Chapter 7 case.

There you go, the borrowers get relief, the lenders get security, and we don’t have 6 to 7 million homes foreclosed upon.

Next time I’ll be talking about a new kind of debt settlement, one that actually works (I guess I’ll have to put the snake away) and I’ll also brighten your day with some famous people who have filed bankruptcy.

Stay tuned…

Dear Senator Specter/Representative Dent:

In 2005, you voted with credit card companies and against the American consumer by voting for BACPA (Bankruptcy Abuse and Consumer Protection Act).

BACPA doubled the cost of filing bankruptcy in the United States.  BACPA chased otherwise qualified attorneys out of the field because of its stringent and unfair requirements that put the lawyers who practice in this field at risk.

This bill further injures those who practice in this field by lumping them in with debt settlement companies and various other non-professional groups by requiring them to call themselves “debt relief agencies.”

A solo attorney is no more a debt relief agency than a chicken farmer is a Kentucky Fried Chicken franchisee.  Both operate in similar arenas but have different functions.

This is the worst economy I have seen in my lifetime, and it is probably the worst you have seen as well.  Real unemployment is somewhere around 18% and people are hurting.

While Congress and the President have spent the last year and a half arguing about National Health Care, the economy has gotten worse.  Like with BACPA, Congress is listening to the special interests with deep pockets, not the people who elect them.  This is a mistake.

While Congress and the President have spent $1.4 trillion ($700 billion TARP, $700 billion stimulus) bailing out banks and stimulating government labor, the economy has worsened.

That $1.4 trillion is gone.  Like toilet paper, it cannot be reused, so pointing out that you could have given every man, woman and child a check for $4700 on a debit card with a 90 day expiration date and jump started our economy much more effectively, is pointless.  Aggravating but pointless.

One thing Congress can do right now is to repeal BACPA.  BACPA was bought and paid for by credit card companies and banks, the same banks that took bailout money from the taxpayers who are suffering under BACPA.

Another thing Congress can do is to allow mortgages to be modified inside of Chapter 13 bankruptcy.  Yes the courts would need some more staff, maybe even a special modification master, but it would alleviate some of the pressure on this economy.

This is how modification inside of a Chapter 13 would work.  Lets take Joe Taxpayer (the guy who is probably going to vote for none of the above in 2010).  Joe has a mortgage of $200,000 at a 9% interest rate.  His payment (not including taxes) is $1609.25.  The total interest paid on the loan would be $379,328.28.  On the date the mortgage was closed, banks were borrowing from the fed at a rate of 2.2%.

The bank can still turn a profit on 2% interest, so the bankruptcy special master would lower the interest rate to 4.4%

Joe Taxpayer’s payment would drop to $1000 per month.  The term of the mortgage would be extended out to 42 years.  The total interest paid on this term would be $238,999.36, but the extra 12 years of principle payments of $1000 would be $144,000.00.

Now Joe Taxpayer can afford his mortgage, and the bank gets what they bargained for, albeit on a delayed basis.

The banks will complain about the time value of money, but the reality is that the average mortgage is paid off in about 5.8 years, meaning mortgages are refinanced or sold, so most banks will not be waiting 44 years to get their money, and when the mortgage is paid off the bank is getting what it bargained for anyway.

So how about it Congressman?  Why don’t we put HAMP and BACPA in the circular file where they belong and do something for the American people?

So there it is, I will follow up on this with a response from my Representatives.  Feel free to cut and paste a copy of this text and email it to your Congressman or Congresswoman and see what happens as well.