It has been a while since I have posted, and I apologize for the silence, it was not intentional. The law practice has been very busy and we hired one paralegal and will be hiring another paralegal at the end of this month. This is a difficult but necessary decision, even for a certified control freak like me.
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…