In the wake of a tidal wave of home foreclosures due to the sinking economy, some experts expect that Congress will have no choice but to take up bankruptcy reform this year.  One provision expected to be changed forbids judges to force banks to renegotiate mortgage terms with homeowners in cases where they file for protection from creditors under the Bankruptcy Code.

Consumer and banking lobby groups have been fighting to get this bankruptcy law modified for years.  Even now, when banks are more vulnerable than at any time in recent memory, efforts to include a provision in the financial market rescue plan that would have required banks to write down mortgage terms under certain conditions failed miserably.  “[Legislators] clearly decided this is not a priority,” at this time, says Ruth Susswein, deputy director of national priority at Consumer Action.  ”But we will continue to push for it, because it is the only plan that actually doesn’t cost the taxpayers anything.”  Lobbyists for the banking industry counter that consumers will simply have to pay higher interest rates charged to offset the cost of writing down bad loans, which means there would be little to no true savings for consumers.

But since today’s housing market has reached crisis point, Congress must promote additional options for the 400,000 homeowners at risk of foreclosure.  As of Oct. 1, 2008, homeowners unable to make payments and who meet the criteria set out by the Federal Housing Authority (FHA), can ask their bank to write down the value of their mortgage to at least 90% of the home’s market value and lower the interest rates on the mortgage.  In exchange, the banks get the security of FHA backing, which means the government guarantees payment should the homeowner default.

Consumer groups claim the measure won’t make much of a dent in the coming avalanche of foreclosures.  Bankruptcies are expected to continue rising, with more and more people losing their homes to lenders.  Banks foreclosed on 1.2 million homes during the first half of 2008, and this number is expected to rise even higher than the total 2007 figure of 1.5 million homes, due in no small part to the rising unemployment level.

“Soon we will discover that the bailout will do nothing to stop foreclosures,” says Henry Summer, president of the National Association of Consumer Bankruptcy Attorneys. “Changing bankruptcy law is the only way to do that.”

Congress may even tackle the 2005 bankruptcy law, addressing consumer complaints that the process is now, on average, 50% more expensive than it used to be.  Reform advocates point out that the law creates unnecessary paperwork and forces people about to file for bankruptcy into pointless credit counseling sessions that often do little more than postpone the inevitable. “Certainly there are a lot of parts of that law that are not doing good for anyone,” says Summer. “It was supposed to ferret out abuses, but it hasn’t.”

Consumers facing home foreclosure are not without hope.  An experienced bankruptcy attorney may well be able to guide them through declaring bankruptcy and keeping their beloved homes in the process.  Despairing homeowners should reach for the life preserver just within their reach–foreclosure does not have to be a foregone conclusion.