July 01, 2003

Short-Term Loans - Some Residential Mortgages Can Be Modified Under Bankruptcy Code 1322 (2003, 17:04)

Short-term Loans - Some Residential Mortgages Can Be Modified Under Bankruptcy Code § 132 2

Probate and Property, July/August 2003, Volume 17, Number 4

By Marc A. Ben-Ezra and Asher Perlin
Marc A. Ben-Ezra and Asher Perlin are attorneys with Marc A. Ben-Ezra, P.A., of North Miami Beach, Florida.

Home mortgage lenders have long enjoyed favorable treatment under the Bankruptcy Code. 11 U.S.C. §§ 101-1440 (2000). In a delicate balancing act to protect consumers, Congress excepted home mortgages from the "strip down" provisions of the Code. A recent flurry of cases in the federal courts of appeal, however, has limited this protection in the context of undersecured and wholly secured loans. The advantage that home lenders enjoy under the Code represents a compromise between two competing interests. The first interest was one of the principal motivations behind the 1978 Code: Congress wanted to give debtors a greater opportunity to make a fresh start. In fact, one of the most significant innovations of the Code was that it permitted debtors to modify the claims of secured as well as unsecured creditors. See Grubbs v. Houston First Am. Sav. Ass'n, 730 F.2d 236, 243 (5th Cir. 1984). This change was significant because modification of debts, commonly referred to as "strip-down," often strips the value of the debt to such an extent that creditors end up collecting mere pennies on the dollar. Nonetheless, the hope was that if debtors could emerge from bankruptcy with a chance to reestablish themselves and their credit ratings, they would have a greater incentive to repay their creditors.

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