Financial reform almost caused rewrite of bankruptcy law

A proposal backed by advocates for homeowners as well as many leading Democrats nearly force the country’s bankruptcy laws to be completely rewritten.

A potential change to bankruptcy law, known as a “mortgagecramdown,” would have allowed judges to change the terms of mortgages for distressed homeowners who wound up in bankruptcy court, according to a Reuters report. The change was being opposed by the banking industry and Republicans. Under current law, bankruptcy courts can alter or reduce many kinds of debt for struggling borrowers – including loans on cars and boats, a vacation home or family farm – but not primary residences.

Reuters said that proponents of the bill, a measure that was passed by the House in March 2009 but was killed in the Senate, said it would help stop home foreclosures in the U.S. Opponents argued that it would raise costs for all homeowners.

A report from the financial news and advice website The Motley Fool said that several banks supported the bill as well, saying that if homeowners are able to modify their mortgages after filing for bankruptcy, the number of strategic defaults will dramatically decrease.