There are 94 federal judicial districts and approximately 300 Bankruptcy Judges to handle all filings and claims made in the Bankruptcy Courts. Bankruptcy Bars are small almost by definition, usually comprised of a fairly tight knit group of specialists. According to RealtyTrac, foreclosure filings surpassed 3 million in 2008, with a staggering 7% of the state of Nevada’s housing units receiving at least one notice of an intent to foreclose. One in 54 American homes received some kind of foreclosure notice.

With rapidly mounting unemployment numbers, 2009 isn’t shaping up to be much better. In response, Congress has re-visited the possibility of allowing Bankruptcy Judges to rewrite first mortgages in chapter 13 plans. The automatic stay provisions of the Bankruptcy Code, which temporarily freeze collection actions, coupled with the ability to “cram down” loans backed by underwater property have many pushing bankruptcy as the solution to the housing crisis. On the surface it makes sense. Lenders have a shameful track record when it comes to modifying mortgages. Forcing their hand through the Court system could provide much needed relief to hundreds of thousands of people, allowing families to avoid foreclosure and stay in their homes with a payment they can theoretically afford.

However, let’s revisit those 2008 foreclosure numbers. One in 54 American households receiving a foreclosure notice? Even if the loan modification provisions of H.R. 4173 were limited to households in some stage of foreclosure (as Senator Durbin’s previous bill was) the number of potential filers would still be staggering. Disputes over valuation would flood the docket with evidentiary hearings. Could the existing Bankruptcy court system, especially in states like California or Florida, handle thousands more cases per month…..on top of an already saturated and overrun system? Could they do so quickly and efficiently as would be required to give meaningful relief to those faced with the possibility of losing their home?

Keep in mind that the same Bankruptcy Courts that adjudicate consumer cases also handle much larger and more complex chapter 11 cases. Upgrading consumer cases from flood to tsunami level could stall chapter 11 cases which are a necessary component to a macro recovery. In theory, legislation like the mortgage modification provision in H.R. 4173 has the potential to aid struggling homeowners. Unfortunately, the consistent problem of government has always been bridging the gap between theory and reality. I don’t know if our tiny Bankruptcy system can handle this giant problem.

John O’Connor