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Can HAMP Help in Bankruptcy?

posted by Katie Porter

About six months ago, the government rolled out guidelines for how HAMP should work for people in bankruptcy. Given bankruptcy's historical role as a foreclosure prevention device, it never made sense to me why from its inception, HAMP did not envision ways for homeowners in existing chapter 13 cases to seek loan modifications and for people to try to obtain a loan modification as part of their chapter 13 bankruptcy. This may have just resulted from the right people not being in touch in a timely fashion. But now that HAMP is available for people in bankruptcy, does it really provide much?

Putting aside all of the proclamations (which I too have uttered) about HAMP's huge weaknesses, what are the particular challenges to using HAMP in bankruptcy? As an initial matter, the guidance says that people in bankruptcy "must be considered fro HAMP if the borrower, borrower's counsel, or bankruptcy trustee submits a request to the servicer."  This is weird. Surely the bankruptcy trustee cannot initiate a HAMP modification without the debtor's consent--right? Or is this supposed to basically give pro se debtors the ability to look to the trustee to act as their attorney in pursuing HAMP modifications? And what is the incentive for chapter 13 trustee to do this? Ostensibly, it might be that a lowered mortgage payment frees up more income that a debtor can devote to unsecured creditors, but if this is all a shell game among creditors, why would a debtor consent?

The UST Program has been aggressively advertising that it supports HAMP (they even made a video--gee, technology to communicate with the public; what's next--a blog?). But I can envisions situations in which the UST finds itself in a conflict of its own policies. For example, what if someone was in progress for a HAMP modification and filed chapter 13. They are above-median but pass the means test because of their mortgage payment. If the HAMP modification is approved, their monthly expenses go down. Is this grounds for a modification? Is this the kind of "known or virtually certain" changes in expense that Hamilton v. Lanningwould permit courts to take account of in determining what a debtor can pay? Or is the extra income a debtor has each month after a HAMP approval just retained by the debtor and the creditors get the payment they would have gotten without HAMP. If the latter is true, it is odd that the trustee would be encouraging HAMP. Perhaps the thinking here is that HAMP modifications will increase plan completion and ultimately increase recovery to unsecured creditors; that is, the percentage stays the same but the dollars paid out are higher because more plans go to completion.

The guidance does have some helpful aspects for debtors who want to pursue a HAMP modification. For example, servicers may accept copies of the bankruptcy schedules in lieu of some of the HAMP documentation. And even better, borrowers in an active chapter 13 may be "converted" to a permanent modification without completing a trial period under HAMP if the bankruptcy court approves the modification, the investor guidelines permit a waiver of the trial period, and the borrower is current post-petition. How often will these be true? No idea. I also have no idea what standard the bankruptcy court is supposed to apply in considering the modification. Insights from the trenches? Are you seeing a lot of HAMP modifications now that we've had this guidance for more than 6 months? If not, are the barriers problems with HAMP or with using bankruptcy in HAMP?

Comments

I have been doing HAMP modifications within a chapter 13 plann for about a year now. The Chapter 13 Trustee and the Courts are on board with it. We generally do not have the HAMP approved by the time of plan confirmation, so the plan is confirmed "subject to HAMP". To show good faith, the plan pays the anticipated HAMP payment (ie. even before approved). Typically the second mortgage is avoided in whole. Status conferences are set for every three months. About 10% have received HAMP or other modifications. The chapter 13 gives a good platform to pursue the HAMP - including increased communications with the mortgagee, ability to take 2004 examination, etc.

It would seem like a good match. One of HAMP's biggest problems is that it looks at the mortgage as a percentage of income - without looking at other debts.

Chapter 13 is very good at helping make those other debts manageable, at least if they are debts owed to general unsecured creditors.

For a long time, HAMP mods were not available to Chapter 13 debtors. That did get changed, but pretty late in the game.

The problem is that very few applicants are able to break through the HAMP requirements to get a HAMP deal. That's no different for debtors in Chapter 13.

The only positive I've seen is that sometimes the Chapter 13 gets the lender's attention. Lenders seeking relief from stay do seem to have more flexibility. Fewer of them have blinders on in going after a foreclosure.

Even so, many of the modifications that are made appear to be non-HAMP mods. And they are of varying quality, in terms of helping the debtors longer term.

:)

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