Bankruptcy Attorney Champions Zero Interest For Underwater Mortgages

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Reed Allmand of Allmand Law (, has partnered with the National Association of Consumer Bankruptcy Attorneys (NACBA) in backing the proposed Principal Paydown Plan (PPP) designed to address the foreclosure crisis.

Reed Allmand of Allmand Law (, has partnered with the National Association of Consumer Bankruptcy Attorneys (NACBA) in backing the proposed Principal Paydown Plan (PPP) designed to address the foreclosure crisis. The implementation of PPP would allow underwater homeowners who file Chapter 13 bankruptcy to apply their entire monthly mortgage to the principal only for a period of five years by temporarily reducing their interest rate to zero.

According to a report by the Center For Responsible Lending, over 6 million Americans have lost their homes to foreclosure and that number is expected to increase to 13 million by the end of 2014. The Making Home Affordable Program (HAMP) has failed abysmally in its efforts to address the foreclosure crisis, resulting in millions of dollars in lost equity and property. Allmand and NACBA believe that PPP can reverse this trend by using Chapter 13 bankruptcy to restore equity in underwater homes and give mortgage servicers an alternative to foreclosure.

According to statistics released by the National Association of Consumers Bankruptcy Attorneys, currently there are 1.6 million active and pending Chapter 13 bankruptcy cases. Approximately 880,000 of those bankruptcy cases include mortgages. Each month an additional 22,000 new Chapter 13 bankruptcy cases that include mortgages are filed. With numbers like this, there is an opportunity to use the bankruptcy process to fight the foreclosure and win.

By using the Principal Paydown Plan in Chapter 13 bankruptcy, homeowners, mortgage servicers and entire communities can benefit in the following ways:

  •     Restoring Equity. PPP does not “cramdown” first mortgages or reduce the principal mortgage amount to a fair market value. The proposed program will only allow the bankruptcy debtor to pay the principal only for a limited amount of time (five years). This process will restore some equity by reducing interest to 0% for five years. At the end of five years, the principal balance will be amortized over 25 years at market rate. The restored equity and zero interest rate will give the homeowner an incentive to avoid foreclosure in the future.
  •     Prevent Walk Aways and Reduce Foreclosures. PPP will give homeowners an incentive to remain in their home and avoid foreclosure after bankruptcy. Currently, even homeowners who have received mortgage modification through HAMP are falling into foreclosure. The foreclosure process is costing lenders money and clogging the property markets with excess housing inventory. PPP aims to alleviate this problem.
  •     Eliminate Junior Liens. PPP uses existing bankruptcy law to void unsecured junior mortgages, improving the homeowner’s ability to pay the senior mortgage after bankruptcy. Only those liens which are not wholly secured by the property’s value will be voided.
  •     Reduce Litigation. In exchange for their participation in PPP, homeowners are obligated to settle all claims against mortgage stakeholders. This settlement will allow both homeowners and mortgage servicers to avoid expensive and time-consuming litigation.
  •     Guarantee Payments. Because Chapter 13 bankruptcy is supervised by a federal bankruptcy judge and trustee, mortgage servicers can rely on the court to distribute timely monthly payments for the mortgage.
  •     Reduce Unsecured Debt. The discharge of unsecured debts in bankruptcy leaves the debtor with more cash to pay their mortgage. Outside of bankruptcy, mortgage obligations compete with other financial responsibilities such as credit card debt.
  •     Save Family Homes. PPP benefits communities by reducing foreclosures in neighborhoods where families live. Too many communities have experienced property value declines because of a high number of foreclosures. And Since the PPP plan will only apply to principal residences, the mortgage servicer need not worry that debtors will try to apply the Principal Paydown Plan to second homes or rental property.

Reed Allmand is a Board Certified Consumer Bankruptcy Attorney, the managing partner of the law firm Allmand Law and NACBA’s State Chair for the Northern District of Texas. He has been practicing bankruptcy law for nearly 10 years and has handled more than 3,000 bankruptcy filings. Allmand has appeared on “Money for Breakfast” on Fox Business News and is the author of “The Truth about Bankruptcy.” To speak with Mr. Allmand or to schedule an interview, please call (214) 265-0123.

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Tiffany Denlinger
Allmand Law
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