October 10, 2008
Fight for the Family Home
By ERIC S. NGUYEN
LENDERS have been foreclosing on about 250,000 homes every month this year – one every 10 seconds. And among the hardest-hit Americans have been families with school-age children. Many of those families file for bankruptcy; indeed, nearly two-thirds of those trying to save their homes in bankruptcy have young children. Yet our laws make it especially difficult for families to keep their homes.
Consider two different couples facing foreclosure. The first rents a penthouse apartment to live in and then takes out a loan to purchase a house to rent out as an investment property. After racking up a mountain of credit card charges, the couple files for bankruptcy.
The second couple has two young children and buys a home to live in. When illness keeps the mother from working for six months, the family falls behind on bills and files for bankruptcy. Which family should have a chance to keep its home?
If you said the family with children living in their own home, you might be surprised to learn that Congress disagrees. While the bankruptcy code Congress amended in 2005 allows a judge to modify mortgage terms for an investment property in order to make the monthly payments affordable, it expressly prohibits modification of terms on a primary residence without the foreclosing bank’s permission. A court can insist that creditors give more time and better terms for people in bankruptcy to pay back loans on cars, boats, rental property and vacation homes – but not on the family home.
For parents with children, of course, there is little relief in keeping the car but losing the home. Data that I have analyzed from Harvard’s 2001 Consumer Bankruptcy Project, a survey of 1,250 people who had recently filed for bankruptcy, indicate that a key reason families with children file is to keep from losing their houses. Having young children nearly doubles the likelihood that the average family in bankruptcy will continue making mortgage payments – to keep the children in the same school and stay in the same neighborhood.
Bankruptcy laws should be flexible enough to allow some parents who will regain their financial footing to continue to make house payments, while denying the same relief to financially irresponsible investors. In addition to helping families, this would help reduce the depressing effect of foreclosures on house prices. And unlike the current McCain proposal iit would cost the taxpayer nothing.
Congress missed the chance to include this critical reform in its recent $700 billion bailout for financial institutions. But both Republicans and Democrats should see the wisdom of fixing the problem quickly. Automatic foreclosures on family homes do not reflect our shared sense of fairness. And bankruptcy reform is an important step on the road to recovery.
Eric S. Nguyen is a student at Harvard Law School.