The pending legislation “Helping Families Save Their Homes In Bankruptcy Act of 2009” which is designed to help homeowners avoid foreclosure will allow homeowners to modify interest on an existing mortgage.

The legislation, if passed would allow a mortgage loan interest modification on toxic loans such as subprime and adjustable rate mortgage (ARMs) in a Chapter 13 bankruptcy . Homeowners facing foreclosure who have high-cost subprime mortgage loans would be able to reduce their interest rates in Chapter 13 bankruptcy.

In the case of adjustable rate mortgages (ARMs) the Chapter 13 bankruptcy court would modify interest rates on mortgages nearing foreclosure by “prohibiting, reducing, or delaying adjustments to such rate of interest…” In other words, the bankruptcy court would prevent ARM interest rates from “exploding” because they would freeze the mortgage interest rate at the current rate and convert the ARM into a fixed rate loan.

Exploding ARMs are the mortgage that started this foreclosure crisis and are continuing to have a huge impact on the nation’s foreclosure rate. If ARMs can be modified during Chapter 13 bankruptcy we will see many vulnerable homeowners avoid losing their homes in foreclosure.