Foreclosure Prevention may be moving to bankruptcy court.

The Wall Street Journal Reports that Citigroup, having taken billions of bailout dollars, may be ready to lead a 180-degree turnaround in lenders’ objections to letting bankruptcy judges do mortgage “cram downs.” If these negotiations with the Senate come to pass as predicted, bankruptcy courts will be allowed to reduce both the principle and the interest rate on the mortgages of people who file bankruptcy.

Rep. Barney Frank (D-Mass) has been pushing for this for months, with our enthusiastic support. It’s crazy that bankruptcy courts cannot adjust mortgage debt on residences. Bankruptcy judges can wipe out credit card debt, and reduce mortgages on vacation homes and make other adjustments to allow people in trouble to restart their lives on sound financial footing.

The terms are not yet known, but the courts will probably be allowed to reduce the principle balance of a residential mortgage down to as little as 90% of the current market value of the home, and decrease the interest rate to something closer to the 30-year prime rate. If this would not be enough to allow the borrower to make the new payments, then the court would not approve the plan and the house would be foreclosed.

As a practical matter, if your mortgage is delinquent, you might want to stall the lender as much as you can until we can see how the bankruptcy law is changed. Filing bankruptcy may be the best way to get a reasonable deal on your home.

Even though the terms of the change are not known you might benefit from a free session with a bankruptcy attorney who can tell you what you might expect if the courts are given this right.

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