Chapter 7 of the U.S. Bankruptcy Code exists to satisfy the claims of creditors and preserve an economic “fresh start” for the debtor after bankruptcy. In exchange for surrendering her property to the trustee to have it monetized (i.e., sold), the debtor receives a discharge of her debts and an injunction against future creditor in personam actions to recover them. However, the in personam injunction is insufficient to protect consumer debtors who are in default on mortgages encumbering underwater homes because the creditor’s in rem rights remain; after the conclusion of the case, the creditor can continue foreclosure proceedings, which result in eviction and often homelessness. The economic, educational, and health externalities of foreclosure and homelessness are detrimental to individuals and harmful to society at large. The Bankruptcy Code already possesses the tool to prevent these harms without disadvantaging creditors—the right to redeem under § 722—but currently restricts redemption to personal property. This Note argues for a statutory amendment to § 722 that extends the right of redemption to real property.
While this note does, unlike much of consumer bankruptcy scholarship, recognize that Chapter 7 debtors often "gain nothing buy the automatic stay's temporary delay before eventual foreclosure and eviction" and does also grasp some of the nuances of Chapter 7, such as ride-through, that are otherwise overlooked, its does pass over too quickly how in Chapter 13, despite the anti-mortgage modification provisions of 11 U.S.C. § 1322(b)(2), debtors can often strip-off junior mortgages, cram-down mobile home/land packages, or rewrite accelerated or ballooned notes. These options are worth comparing and contrasting with the proposal that 11 U.S.C. § 722 be amended to allow homestead redemptions. Even more basic, Chapter 13 allows a cure of mortgage delinquencies and is a primary means of preventing foreclosures.
A more glaring omission, however, is the lack of any mention of Dewsnup v. Timm, 502 U.S. 410 (1992), where the Supreme Court held that 11 U.S.C. § 506(d) does not allow debtors to "strip down" respondents' lien to the judicially determined value of the collateral. Particularly given the hostility to Dewnsup by not only Justice Scalia, but also by several current Justices, this would seem a more likely avenue for changing the law.
That, notwithstanding, the ability to rewrite home mortgages is a key portion of the the Consumer Bankruptcy Reform Act recently introduced by, among others, Senator Elizabeth Warren.
For a copy of the law review note, please click here:
Bankruptcy & the Underwater Home: A Case for Real Property Redemption