Win-Win Bankruptcy Reform

As banks are asking for billions to stay afloat, they are not cutting deals for the small homeowner.

Bankruptcy judge in the Washington Post:

"Homeowners are the only ones who cannot modify the terms of their secured debts in bankruptcy. Corporate America flocks to bankruptcy courts to do precisely this -- to restructure and reamortize loans whose conditions they find onerous or can no longer meet. Airlines are still flying and auto parts makers still operating because they have used this powerful tool of the bankruptcy process. Lehman Brothers will surely invoke it. But when the bankruptcy code was adopted in 1979, the mortgage industry persuaded Congress that its market was so tightly regulated and conservatively run that it should be exempted from the general bankruptcy rules permitting modification."

With so many homes being foreclosed on, is it better to let homeowners adjust what they owe based on what the house is really worth in bankruptcy courts?

"Such a solution would have been better for everyone. Obviously, it would have been good for the homeowner and the community in which she lives. Instead of another abandoned house tied up in foreclosure, her residence would be owned by a taxpaying citizen. More important, it would have been good for the lender. Whatever unknown mortgage syndicates hold pieces of this loan, they are never going to get their 14 percent return. Instead, the total recovery will be limited to the proceeds from a foreclosure sale in a depressed market."

The modifications as stated in the article "would elegantly separate those homeowners who desperately need to stay in their homes and have sufficient incomes to make reasonable payments from those investors who bet on lax regulation, easy credit and an appreciating market in buying residential properties."

This approach goes against America's somewhat vindictive nature of "getting what you deserve" and will be a test of how far we have come as a society. Bush and Co changed the bankruptcy laws in favor of the banks and credit cards, it's time we change it back in our favor now that they've been bailed out with taxpayer money.

Source: WaPo