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Strenghten bankruptcy laws to protect mortgage consumers
KEN GROSS • March 9, 2009
In times past, Americans were told to tighten our belts and streamline expenses. This economic crisis, however, is much different. e are in a war for survival. But if this is war — who is the enemy?
The banks and credit card issuers are the enemy. How can banks be allowed to charge people 32% interest? How can banks have the right to bump interest rates up to 32% when you are only one day late on a payment? In the current crisis, the banks have made matters even worse. Thousands of people who have never been late on a credit card payment have seen their credit ratings ruined in the last four months.
Here’s what has happened. Your credit score is a function of your payment history, the amount of debt that you have and your available credit. When the credit crunch occurred, banks slashed the available credit lines of thousands of their customers, reducing their customers’ credit limits down to the outstanding balance on the accounts.
This action ruins the individual’s credit score because the cardholder’s ratio of debt to available credit immediately sinks to zero. Is there any doubt that the banks are the enemy? Many of these banks have taken billions of federal TARP money. Rather than using this money to ease the credit market, they have the audacity to use these funds to pay billions in bonuses to their employees.
So what is the solution?
The banks and mortgage lenders are not going to help unless it is in their financial interest. Our government, which has failed us miserably over the last decade, is finally waking up. The proposed Helping Families Save Their Homes in Bankruptcy Act of 2009 is a positive step. This legislation, which has the Obama administration’s backing, will provide two opportunities to obtain relief.
The legislation changes Chapter 13 bankruptcy law so that a person who seeks relief will have the ability to reduce the outstanding balance of their home mortgage to the fair market value of the property. More importantly, and what few people realize, is that this legislation will create an opportunity to negotiate with the lender based upon the threat of filing for bankruptcy relief without having to actually file. Every homeowner who is in a negative equity position will have a new channel to negotiate with the mortgage lender.
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Presently, loan modification negotiations are very frustrating and one-sided. This law will improve the homeowner’s bargaining position. The bank will no longer be in a position to dictate the negotiations because the bank will not want to face the prospect of adverse consequences when the bankruptcy judge determines the reduced amount and terms of the renegotiated mortgage.
In the year 2025, the textbooks will speak of two economic crises that our nation faced. The first will be the Economic Crisis of the 2000 Decade. The second will be the Great Depression. Now is the time is for each of us to marshal our resources to pursue a strategy so that when greener pastures arrive, we are not saddled with debt from the past era.
Ken Gross is a managing shareholder at Thav, Gross, Steinway and Bennett, P.C., a Metro Detroit law firm specializing in financial crisis management strategy development. Gross is also host of “Financial Crisis Talk Center,” which airs at 9 a.m. Saturdays on WDFN Radio 1130 AM. Write to him at firstname.lastname@example.org