Bankruptcy is often one of the last resorts that homeowners facing foreclosure rely on to get some relief. The social and financial stigmas that come with this method are often enough to scare away many people from filing. However, in the right situation, bankruptcy can be a powerful tool to get a short break from an accelerating foreclosure process and bring the mortgage lender and other creditors back to the negotiating table.

There is also a slight possibility that bankruptcy court judges may be granted more power to work out solutions in favor of homeowners. One proposal floating around Congress to fix the foreclosure crisis involves allowing these judges to reduce the total amount homeowners owe on a mortgage loan. Bankruptcy courts do not currently have this power, and the proposal is a response to the sharp declines in home values that have made some homeowners owe far more than their properties are worth.

Currently, homeowners who file Chapter 13 bankruptcy to stop foreclosure are unable to reduce the amount they owe on the mortgage on their primary residence through the legal process. Second homes, investment properties, or vacation homes are eligible for some additional relief in the form of debt reduction, but the mortgage company is protected on the primary residence. This is mainly what the proposal in Congress is attempting to address.

The bill, though, will not easily pass to become law. Even if the proposal passes with majorities in both Houses of Congress, the president has threatened to veto the bill as interfering with the right of homeowners and mortgage lenders to enter into voluntary contracts. If banks' loans could be altered later on through bankruptcy, they would be more inclined to raise interest rates to collect more money right away. Giving this power to the bankruptcy judges would also make it more difficult for borrowers with poor credit to get a mortgage at all, for fear of having the loan amount reduced.

There is also the very real possibility that, if the proposal looks like it will pass, more lenders will move towards foreclosure more quickly. They will attempt to have the properties sold at sheriff sale and get the property listed on the market as soon as possible, so the homeowners do not even have enough time to consider the possibility of filing bankruptcy. This would cause a bad foreclosure crisis to get even worse in a very short period of time.

There could be numerous benefits to the new laws, if the proposal had the potential to pass, and many homeowners currently deeply underwater in their loans no longer feel as great an incentive just to give up on the house. Negotiating a lower mortgage balance could persuade some of these people to stay in the house and pay a fair price for the right to remain in the home. And not all banks are willing to negotiate mortgage modifications, so the strength of a bankruptcy judge on the side of the homeowners may allow more people to stop foreclosure in the long run.

Unfortunately, it looks as if this one attempt to give the people more power over the banks will fail. And with all of the negative consequences of foreclosure and bankruptcy that will haunt homeowners for years after the fact, the mortgage lenders will continue to hold Americans hostage to expensive mortgages on overvalued properties. Filing bankruptcy to stop foreclosure can be a very welcome last resort for homeowners in danger, but it looks as if they will not be given the chance to negotiate in the courts to work out any better terms for their loans.

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