LawsonGroupMediation

In April, the Senate defeated a bill to permit mortgage cramdowns, which would have allowed a bankruptcy court to forcible modify a mortgage.  Recently, however, Barney Frank (D-Massachusetts) threatened to resurrect cramdown legislation after Treasury announced disappointing results of their modification efforts.  Frank stated that if the lenders do not increase the modifications he and his colleagues will again pursue cramdown legislation.

The ability of the bankruptcy courts to cram down mortgages would be a healthy boon to short sale agents.  Why?  Because chapter 13 plans can be written to sell the home in a short sale rather than modify the loan and this provision would be an incentive to process the case as a short sale.

Right now, few bankruptcy attorneys use the chapter 13 to help troubled borrowers to sell their home in a short sale.  The reason?  Most do not understand that a short sale as part of the bankruptcy is far better than a foreclosure or DIL (deed-in-lieu) in the bankruptcy.  They do not realize that a foreclosure or DIL may prohibit a debtor from ever again owning a home.

Being able to cram down the value to modify the payment provides a great incentive to permit, on the other hand, application to the SMI to approve a short sale.  Along with lien stripping provisions of those bankruptcy circuits that permit it, Chapter 13′s can be used quite effectively to manipulate a short sale in the face of servicing lender blocking or looming foreclosure sale.

Any of you wishing to explore these issues further can go to my earlier blogs about using bankruptcy to effect a short sale or you can email or call me.

Ken Lawson, JD

TheLawsonGroup Mediation Services