The Bankruptcy Lawyers Blog

Earlier today, the House Rules Committee agreed to allow the mortgage modification in bankruptcy provision to be considered as an amendment to the broader financial services reform bill.  The issue could reach the house floor as early as this afternoon, so please take a moment to contact your U.S. Representative.  It's simple and only takes a minute. Just:

1. Phone toll free at: 877.354.4958

2. Put in your zip code

3. When you reach the receptionist:

• State your name
• Say that you are a constituent
• Ask the Representative to vote FOR the Conyers-Turner-Lofgren amendment (#201) to the Financial Services Reform bill.
• This amendment will cost taxpayers NOTHING and will save millions of homes from foreclosure

(Thanks to NACBA for the quick and easy instructions)

The provision would allow bankruptcy judges to modify mortgages in bankruptcy, and could help millions of people facing foreclosure--and not just those who file bankruptcy.  The ability of bankruptcy judges to make such adjustments would finally provide motivation for mortgage holders to enter into good-faith voluntary modifications that would allow hardworking people to remain in their homes.

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Just weeks after the Bankruptcy Abuse Prevention and Consumer Protection Act took effect in 2005, the small Minnesota law firm of Milavetz, Gallop & Milavetz P.A. challenged the Constitutionality of the statute.

In April of 2007, the U.S. District Court for the District of Minnesota granted the plaintiffs' motion for summary judgment, finding:

1.  Sections 526 (a) (4), 528 (a) (4) and 528 (b) (2) are unconstitutional, "as applied to attorneys in the District of Minnesota".

2.  Attorneys in the District of Minnesota are excluded from the term "debt relief agency" as defined in 11 U.S.C. section 101 (12A) and, as such, are not subject to any of the duties relating to BAPCPA defined debt relief agencies.

Later  that year, the 8th Circuit Court of Appeals affirmed in part and reversed in part, finding that Congress did intend to include attorneys within the definition of "Debt Relief Agencies" for purposes of the statute, but that the restrictions set forth in 526(a)(4) were unconstitutional as applied to attorneys.  The provisions of 528(a)(4) and 528(b)(2), however, passed muster under the rational basis test. 

Earlier this week, more than four years after the law took effect and the initial challenges were filed, the United States Supreme Court heard arguments in the case. Anna Christensen at SCOTUS Blog provides an overview of the hearing, along with questions posed by each Justice.  The Court appears divided, with Chief Justice John Roberts focused on the conundrum presented to attorneys who are both required to (by state ethical canons) and prohibited from (by BAPCPA) giving certain advice.  Justice Scalia, according to both the New York Times and Washington Post, conceded that the law was stupid but asked "Where is the prohibition of stupid laws in the Constitution?"

The high court's ruling will finally lay to rest the conflicting application of the provisions, which have been struck down or partially struck down as applied to attorneys in some areas of the country but not others.

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