On January 6th, 2009 Senate Bill 61 was introduced in the United States Senate.  Senate Bill 61 provides for the amendment of the Bankruptcy Code to allow for the “cram down” of mortgage debts.  What this means is that the Bankruptcy Court would be given the power to rewrite the terms of your mortgage.  Depending upon various factors, you may be able to remove second mortgages and home equity lines of credit.  The terms of any remaining mortgages can be modified to reduce the amount owed on the principle, lower interest rates, extend the term of the mortgage and thereby lower the amount of your monthly payment.
    For example, if your home is worth $100,000 and you owe a first mortgage of $125,000 with a 9% ARM and a home equity line of credit of $25,000, the Bankruptcy Court can remove the home equity loan, reduce the amount you owe on your first mortgage from $125,000 to the value of your home $100,000, and lower your interest rate.  The new principle balance can then be spead out over a period of up to 40 years.  This would eliminate the payment on your home equity line of credit.  Eliminate any amounts that were past due on your first mortgage and allow you to again start making your mortgage payments at a reduced amount.
    In order to qualify for home loan modification in bankruptcy you must first have made a “good faith” attempt to obtain a home loan modification through your lender.  Although few lenders are currently making a serious effort to provide for home loan modifications, it is believed that the threat of intervention by the bankruptcy court will encourage them to be more flexible.  The Senators who sponsored Senate Bill 61 believe it will encourage the vast majority of lenders to modify loans directly with the home owner, with bankruptcy being used as a last resort for a select few.
    Although Senate Bill 61 was just introduced, it is supported by President-elect Obama and appears to have a high legislative priority.  At a news conference on January 8, 2009 the sponsors of the bill indicated that Citifinancial had agreed to support it.  According to the sponsors, this virtually guarantees that it will become law.
       I initially believed this bill would be included in the Bail Out Bill presently pending before Congress, but now believe it will be included in a comprehensive Home Owners Relief Bill.  This is the home owners share of the bail out already given to banks and investment firms.  I will update my blog as any additional information becomes available.