If you’re a HELOC borrower facing foreclosure, Obama’s new Homeowner Affordability and Sustainability Plan has something for you.

The housing plan has a provision that allows “mortgage cram-downs,” a highly controversial practice that allows bankruptcy judges to alter the terms of a mortgage at their discretion. Basically, when the plan becomes law, you could file for bankruptcy and have your mortgage modified and your HELOC payments reduced or even eliminated all together.

Currently, bankruptcy courts can not change the terms of a mortgage for a primary residence. Additionally, many states have recourse laws that allows lenders to go after a delinquent HELOC borrower, even after a property has been sold. In such cases the borrower is personally responsible to pay back the balance of a home equity line of credit and can even have his wages garnished until the debt is satisfied.

USA Today reports on the announcement of the new foreclosure prevention plan and how these changes will work:

“That’s the rule for investors who own two, three and four homes,” Obama said Wednesday. “It should be the rule for ordinary homeowners, too, as an alternative to foreclosure.”

The change in the law would empower judges to lower interest rates, extend the repayment period, and change the principal amount owed on the mortgage to what is determined as the home’s fair market value…

Many homeowners have two mortgages because they have taken out a home-equity loan to pay off their credit card debt.

Under the plan, the bankruptcy filing could wipe out the home-equity loan, enabling the family to keep their home, Lee says.”

Critics of the housing bill worry that too many borrowers will have their mortgage and home equity debt wiped out, even if they are capable of making their monthly payments. However, the announcement of the program comes as a relief for many HELOC borrowers in recourse states. In some cases, these borrowers owe tens of thousands and are “upside-down” on their mortgages due to declining home values. Even if they sold their properties, such borrowers would still owe their home equity lenders. In the coming months, they hope to have their HELOC debt discharged and avoid the burden of paying it back from their own pockets.

photo credit: respres

See Also:

How HELOC Foreclosure Works

List of Non-Recourse Mortgage States & Anti-Deficiency Statutes

Tags | bankruptcy, foreclosure, Heloc, heloc crisis, HELOC foreclosure, home equity line of credit, Homeowner Affordability and Sustainability Plan, housing plan, mortgage cram-downs, recourse states, stimulus