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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

MICHELE NORRIS, host:

And I'm Michele Norris.

Bankruptcy is much in the news this week, along with the troubles of the U.S. automakers. Of course, most bankruptcies involve everyday people who just can't pay their bills. And right now, millions of homeowners can't pay their mortgages, and they're sliding into foreclosure.

Just this week, the government reported that mortgage delinquencies continue to rise. Democrats in Washington want to use the bankruptcy courts to try to help a lot of those people, and NPR's Chris Arnold reports now on what that help might look like.

CHRIS ARNOLD: Some families facing foreclosure, you can't help. They just bought houses that are way beyond their means. Others, though, have decent jobs and could keep their homes if they could get their payments a little lower. But the scale of the problem here is just overwhelming, and regulators say the efforts to help homeowners so far don't seem to be reaching most people.

To see how the bankruptcy courts might help, we called up one of the actual judges who'd be involved.

Judge RICH LEONARD (U.S. Bankruptcy Court, Eastern District of North Carolina): This is Rich Leonard. I'm a judge with the United States Bankruptcy Court for the Eastern District of North Carolina in Raleigh.

ARNOLD: And so how would this work? I mean, how would the bankruptcy courts intervene here?

Judge LEONARD: I think this is the filter that everyone says they can't find between the folks who just chose to speculate in residential real estate and families who just bought a house that they thought they could afford, but now it's simply a bit above their means.

ARNOLD: What would happen is this. By declaring bankruptcy, a homeowner could get to go before a judge, like Judge Leonard, and the judge would decide whether it's fair to restructure their loan and lower their payments. The industry doesn't like the sound of that.

But advocates say a million people might get to keep their homes this way, and they say that could really help the economy by reducing the numbers of foreclosures and vacant homes.

Judge LEONARD: Let me say, and I always have to remind my new law clerks of this, the bankruptcy courts in this country are not social work agencies. It's a rigorous process. Someone who comes in here and attempts to do this has got to persuade me and my colleagues that they actually have a reasonable stream of predictable income that will let them pay this restructured debt.

ARNOLD: It turns out the bankruptcy courts can already intervene with all kinds of other loans: mobile homes, cars, just about anything other than a primary residence.

Judge LEONARD: I see farms, I see vacation homes. I see boats, fishing fleets, commercial real estate, investment property.

ARNOLD: So let's say the borrower owes more than their mobile home is worth, and they declare bankruptcy, one thing the judge can do is reduce the amount owed to the current value of the property. That's called a cram down of the loan.

Judge LEONARD: Could you please state your name for the record?

Ms. CYNTHIA JOHNSTON: Cynthia Joan Johnson.

Judge LEONARD: How long have you owned the home?

Ms. JOHNSTON: I purchased it in April of 2002.

ARNOLD: A recent case in Judge Leonard's court involved a mobile home. The borrower, Cynthia Johnston, was behind on her payments. She owed $59,000, but the mobile home isn't worth that. In this case, the home was damaged during delivery. The frame was bent, and that twisted everything inside of the house out of whack.

Ms. JOHNSTON: I could not get the windows and the doors to open and close properly. I went back and forth from…

ARNOLD: Johnston and her lawyer in court actually tried to argue that the property was so damaged that it was worthless, but it's Judge Leonard's job to listen to a professional appraiser and figure out what the real value of the property is in cases like this. He then approves a payment plan with a reasonable interest rate that the person in bankruptcy has to abide by.

Judge LEONARD: Based on the record here, the court will value this mobile home at $20,850 for purposes of this plan, and that's the value that must be paid…

ARNOLD: Right now, there are a lot of people like Johnston who are struggling and owe more than their house is worth. But if you live in a regular house, not a mobile home, you can't turn to a judge to get help this way.

So many Democrats want to turn those judges loose on the foreclosure crisis. They want to give them the power to modify all kinds of home loans, as judges see fit. They have already pushed a bill through the House, but much of the financial industry is opposed to it, and the bill may be stalling.

Mr. SCOTT TALBOTT (Vice President, Financial Services Roundtable): The House bill was sent over and landed with a thud in the Senate.

ARNOLD: Scott Talbott is a vice president with the industry group, the Financial Services Roundtable. He's lobbying against the bankruptcy bill.

For one thing, he says allowing judges to cram down the amount that borrowers owe will spook the lending industry, and he says lenders will respond by raising interest rates for all borrowers.

Mr. TALBOTT: If you remove that current structure and change the system, then the negative effects on the rest of the market will be to increase the cost of buying a home, which will mean some people will be unable to afford a home, and everyone else will pay more.

ARNOLD: Proponents dispute that. Lawmakers will be working for the next couple of weeks, even though Congress won't be in session, to try to come up with a compromise.

Chris Arnold, NPR News.

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