Detroit Chapter 9 Bankruptcy and the Housing Crisis

Last week, the New York Times published an editorial of the double standard between the Detroit Chapter 9 municipal reorganization that allowed the city to force a restructuring of its debt, including retired pensioners, against a Chapter 13 consumer reorganization by which working men and women have no lever to restructure their home loans. The Times noted that today 8.6 million homeowners still owe more on their mortgages than the value of the residence. While the Times is no doubt correct in its observation, the reason is relatively simple. The Mortgage Brokers Association is a very potent political force, and pensioners and retired employees have little political muscle. At Checkett & Pauly, we have long believed that the country and our economy would be better off if those who are making payments, but are underwater on their home mortgages, had the option under Chapter 13 to restructure their home loans. Bankruptcy courts are well equipped and well experienced to handle all kinds of reorganizations. Realistically, however, it is highly unlikely that this double standard will change, because of politics as usual.