The U.S. housing market began to slow in early 2006 and has led to what many economists believe is the worst housing finance environment since the Great Depression of the 1930s. As a result, there has been a significant rise of late mortgage payments, foreclosures, and bankruptcies nationwide. High unemployment has exacerbated these problems. Many believe the market will get worse in the absence of changes in laws and/or regulations. For instance, Mark Zandi, the chief economist of Moody's Economy.com, estimates that 4.9 million foreclosures will occur between 2009 and 2011. In an attempt to stem the tide of foreclosures and bankruptcies, a number of voluntary loan modification programs have been initiated, including the Obama Administration's Making Home Affordable Program. These programs seek to make mortgage payments more affordable to homeowners who are having, or likely will have difficulty meeting their mortgage obligations, while also avoiding the costs for both debtors and creditors associated with a foreclosure or bankruptcy. However, there are a number of obstacles that have operated to discourage mortgage servicers and creditors from performing loan modifications in advance of foreclosure or a petition for bankruptcy, even in situations in which a modification would be the most economically beneficial outcome for most interested parties. There are many barriers to a successful loan modification. One notable obstacle is the way in which mortgage servicers are paid. Servicers often do not hold an ownership interest in the underlying mortgage. Instead, they process and distribute borrowers' principal and interest payments for those who do own the mortgage. Mortgage servicers' primary source of revenue is through a fixed percentage of a borrower's regular monthly mortgage payments. When borrowers become delinquent or default on their monthly payments, servicers also may engage in loss mitigation and initiate foreclosure proceedings on behalf of mortgage holders. In fact, these actions usually are performed simultaneously. Foreclosure proceedings generally are more streamlined than loss mitigation efforts, which are more tailored to the individual characteristics of borrowers and their underlying homes. As a result, engaging in loss mitigation efforts usually is more expensive and time consuming for servicers than initiating foreclosure. In absence of a structured loss mitigation or loan modification program, such as the Making Home Affordable Program, that offers incentive payments for participation, servicers often do not receive any compensation for the time and energy they spend engaging in loss mitigation. On top of these costs, servicers, under some circumstances, are contractually obligated to advance principal and interest payments to secondary market participants when the borrower is delinquent. Servicers only begin receiving payment when delinquent borrowers resume monthly payments, and because servicers usually get paid a set percentage, their compensation decreases when borrowers' monthly payments are reduced. On the other hand, servicers are able to recoup certain fees assessed during the foreclosure process. These fees can be significant. Thus, servicers often receive more in compensation through a foreclosure than they do through loss mitigation or loan modification. This is especially true where a servicer goes through the time and effort of offering a borrower a modification only to have the borrower redefault in the near future. Some argue that voluntary modification programs have not been effective enough. In a letter sent to Speaker of the House Nancy Pelosi and House Minority Leader John Boehner, the Attorneys General of 22 states and the District of Columbia stated: In recent months, State Attorneys General have especially focused on urging mortgage servicers to avoid unnecessary foreclosures by modifying unaffordable loans in a manner that serves holders, servicers, homeowners, and the public. Through the multi-state Foreclosure Prevention Working Group, we collected data which demonstrates that voluntary loan modification measures have failed.... Because most troubled mortgages are securitized, multiple stakeholders may be involved in the decision to modify mortgage loans, causing a continued paralysis. Although some major lenders have recently embarked on loan modifications on a wide scale, many servicers and secondary market investors remain unwilling or unable to act, even when their own economic interests dictate otherwise. Proponents of amending the Bankruptcy Code believe allowing strip down of primary residences would have two important results. First, it would encourage the voluntary modification of mortgages before default or delinquency that may drive borrowers into bankruptcy. Second, they believe that where voluntary workouts prior to bankruptcy could not be achieved, strip down would adjust the mortgage terms such that the costs and benefits are efficiently spread among debtors and creditors, while allowing debtors to remain in the home after bankruptcy. Senator Durbin, before the Senate Committee on the Judiciary, stated: As we heard at last year's hearing, the benefits of this proposal [to allow the modification of certain mortgage debts in bankruptcy] are clear. We heard testimony that: •My legislation would significantly reduce the number of foreclosures and help hundreds of thousands of families stay in their homes. •Mortgage modification in bankruptcy benefits everyone - the homeowner, the lender, the neighboring homeowners and the economy - far more than foreclosure. •My proposal would give lenders, servicers and investors a real incentive to voluntarily rework mortgages.... Professor Adam Levitin, at the same Senate Judiciary Committee hearing, explained: In a perfectly functioning market without agency and transaction costs, lenders would be engaged in large-scale modification of defaulted or distressed mortgage loans, as the lenders would prefer a smaller loss from modification than a larger loss from foreclosure. Voluntary modification, however, has not been happening on a large-scale, for a variety of reasons, most notably contractual impediments, agency costs, practical impediments, and other transaction costs. If all distressed mortgages could be modified in bankruptcy, it would provide a method for bypassing the various contractual, agency, and other transactional inefficiencies. Permitting bankruptcy modification would give homeowners the option to force a workout of the mortgage, subject to the limitations provided by the Bankruptcy Code. Moreover, the possibility of a bankruptcy modification would encourage voluntary modifications, as mortgage lenders would prefer to exercise more control over the shape of the modification. An involuntary public system of mortgage modification would actually help foster voluntary, private solutions to the mortgage crisis.... Allowing bankruptcy to serve as a forum for distressed homeowners to restructure their mortgage debts is both the most moderate and the best method for resolving the foreclosure crisis and stabilizing mortgage markets. Unlike any other proposed response, bankruptcy modification offers immediate relief, solves the market problems created by securitization, addresses both problems of payment reset shock and negative equity, screens out speculators, spreads burdens between borrowers and lenders, and avoids both the costs and moral hazard of a government bailout. Others argue that amending the Bankruptcy Code alone would not promote voluntary modifications outside of bankruptcy because such legislation would not directly address the payment, tax, accounting, and litigation concerns that are the main deterrent to voluntary modifications. For instance, a group of Columbia University professors argue that [P]roposals to change the [Bankruptcy] Code could dramatically increase bankruptcy-filing rates. Servicers will prefer mortgage modification in bankruptcy because their expenses are reimbursed in bankruptcy, not outside it. Thus, proposed reforms could push millions of borrowers into bankruptcy, delaying the resolution of the current crisis for years. Still others believe allowing modifications of these mortgages in bankruptcy will reduce market stability. For instance, Professor Mark S. Scarberry, a Resident Scholar at the American Bankruptcy Institute, believes allowing strip down of primary residence mortgages would "cause problems in the secondary mortgage market" and would "substantially change the risk characteristics of home mortgages...." Additionally, David G. Kittle, Chairman of the Mortgage Bankers Association, has testified: One of the greatest potential destabilizing initiatives is the topic of discussion today - allowing bankruptcy "cramdown" for home mortgages.... We understand the well intentioned goal of such legislation is to provide a back stop against the large numbers of foreclosures. However, the unintended result would be large numbers of bankruptcies, higher losses to servicers, lenders and investors, and reduced ability by the financial industry to extend affordable credit. Such bankruptcy reform will have a negative impact on individual borrowers, a housing recovery and the economy as a whole. At least four bills that would amend Section 1322 of the U.S. Bankruptcy Code have been introduced in the 111 th Congress. These bills are S. 61 and its House companion, H.R. 200 (the Helping Families Save Their Homes in Bankruptcy Act of 2009); H.R. 1106 (the Helping Families Save Their Homes Act of 2009); and H.R. 225 (the Emergency Home Ownership and Mortgage Equity Protection Act). Additionally, an amendment, S.Amdt. 1014 , to S. 896 (the Helping Families Save Their Homes Act of 2009; Senate companion bill to H.R. 1106 ) would allow for the judicial modification of certain mortgages in bankruptcy but was voted down 45-51 and withdrawn on April 30, 2009. S. 896 was signed into law on May 20, 2009 as P.L. 111-22 without making any changes to the Bankruptcy Code. More recently, during floor consideration of H.R. 4173 , the Wall Street Reform and Consumer Protection Act of 2009, the House voted down an amendment that would have allowed strip down of certain mortgages in bankruptcy. H.Amdt. 534 (Amdt. 018 as printed in H.Rept. 111-370 ) failed by a vote of 188-241. This report provides an overview of the general Chapter 13 process and analyzes how these pieces of legislation seek to amend Chapter 13.